BLOCKCHAIN REVOLUTION [Intro/9] – Terminology

centraldecentraldistributed


Much of the noise and confusion can stem from unclear terminology. Here I define terms in general context.

Bitcoin:

the bitcoin network protocol. name of a cryptocurrency.

“Bitcoin is a peer-to-peer version of electronic cash that allows payments to be sent directly from one party to another without going through a financial institution. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. – Satoshi Nakamoto” (source: bitcoinfoundation.org)

bitcoin:

a unit of currency. BTC. Example: 1 bitcoin or 20 bitcoins or 0.000002 bitcoin

a blockchain:

a digitized, decentralized, public ledger of all cryptocurrency transactions. As ‘completed’ blocks (the most recent transactions) are recorded and added to it as a chain in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically. (source: investopedia.com)

a block:

the ‘current’ part of a blockchain, which records some or all of the recent transactions (source: investopedia.com)

the bitcoin blockchain:

the blockchain technology specifically with its native coin – bitcoin. Bitcoin is mined as an incentive for miners.

Distributed Ledger Technology(DLT):

refers to the blockchain technology. blockchains.

The technological infrastructure and protocols that allows simultaneous access, validation and record updating in an immutable manner across a network spread across multiple entities or locations. More commonly known as the blockchain technology, DLT was introduced by bitcoin and is now a buzz word in the technology world given its potential across industries and sectors. (source: investopedia.com)

The Distributed Ledger Technology is all about the idea of a “decentralized” network against the conventional “centralized” mechanism, and is deemed to have far-reaching implications on sectors and entities that have long relied upon a “trusted third-party.” (source: investopedia.com)

The bitcoin blockchain is considered part of the Digital Ledger Technology.

Ethereum:           

Launched in 2015, Ethereum is a decentralized software platform that enables Smart Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. (source: investopedia.com)

Ethereum is not just a platform but also a programming language (Turing complete) running on a blockchain, helping developers to build and publish distributed applications. The potential applications of Ethereum are wide ranging. (source: investopedia.com)

The applications on Ethereum are run on its platform-specific cryptographic token, ether. During 2014 ICO, Ethereum had launched a pre-sale for ether which had received an overwhelming response. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inside Ethereum. Ether is used broadly for two purposes, it is traded as a digital currency exchange like other cryptocurrencies and is used inside Ethereum to run applications and even to monetize work. The current market cap of ether (ETH) is now more than Ripple and Litecoin although its far behind bitcoin (BTC). (source: investopedia.com)

ether:

a token mined on the Ethereum blockchain. Ethereum’s tokens are created through the process of mining at a rate of 5 ether per mined block. Approximately every 12-15 seconds, a miner finds a block. If miners start to solve the puzzles more quickly or slowly than this, the algorithm automatically readjusts the difficulty of the problem so that miners spring back to roughly the 12-second solution time. (source: coindesk.com)

The miners randomly earn these ether, and their profitability depends on luck and the amount of computing power they devote to it. Furthermore, Ethereum aims to transition from proof-of-work mining to ‘proof of stake.’ Under proof of stake, Ethereum might not need miners forever, though. (source: coindesk.com)

Proof of Stake is useful in fields where high demands in energy efficiency and fairness are required. There are NO computational resources competitions in PoS. One doesn’t have to solve a puzzle to get rewarded. An owner of the higher stake gets a block fee reward. It may come in handy in the following industries:

banking, supply chain, marketing, loyalty systems. (source: http://www.cryptoninjas.net) 1

Litecoin:

Launched in the year 2011, Litecoin is an alternative cryptocurrency(i.e. altcoin) based on the model of Bitcoin. Litecoin differs from Bitcoin in aspects like faster block generation rate and use of scrypt as a proof of work scheme. Litecoin was developed with the aim to improve on Bitcoin’s shortcomings, and has earned industry support along with high trade volume and liquidity over the years. (source: investopedia.com)

Ripple:

Ripple is a technology that acts as both a cryptocurrency and a digital payment network for financial transactions. Ripple was released in 2012 and co-founded by Chris Larsen and Jed McCaleb. The coin for the cryptocurrency is premined and labeled XRP. (source: investopedia.com)

While Bitcoin relies on raw computing power to perform validation of its network, XRP relies on agreement of validators. Once a ledger is created, it can never be undone; hence the concept of ‘final settlement’ in XRP that is missing in Bitcoin. In Bitcoin, it is still possible for a transaction to be reversed in a subsequent block. As more and more blocks occur, however, this likelihood significantly decreases to almost-zero. Hence, the necessity to wait for six blocks before a transaction is really considered final in Bitcoin. This can take up to an hour, while XRP settles in under four seconds. (source: https://xrphodor.wordpress.com/)

mining (Bitcoin):

the process through which bitcoins are released to come into circulation. Basically, it involves solving a computationally difficult puzzle to discover a new block, which is added to the blockchain, and receiving a reward in the form of few bitcoins (source: investopedia.com)

Not every cryptocurrency requires mining. Ether, under Proof of Stake consensus mechanism, doesn’t require miners to mine it. Also, Ripple doesn’t involve mining nor miners.

miners (Bitcoin):

the independent individuals and companies who own the governing computing power and participate in the bitcoin network. They are motivated by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the bitcoin network. (source: investopedia.com)

consensus:

With decentralized public ledgers, or blockchains, no administrators exist for managing the database and making a decision on what files to store and how to update. So independent nodes in peer-to-peer networks must come to a consensus on the status of the ledger. (source: bitcoin.com.au)

In the bitcoin blockchain, “mining” is used for reaching consensus: how a peer-to-peer network could agree on the status of the public ledger continually and in real-time without stalling the cryptocurrency. Mining is when the nodes in the network participate in a form of lottery where they compete to solve a cryptographic puzzle. The winner gets the right to update the public ledger for ten minutes, subject to protocol rules. (source: bitcoin.com.au)

Common consensus protocols used by other cryptocurrency blockchains are Proof of Work, Proof of Stake, Proof of Capacity, Proof of Burn, and Tangle. (source: bitcoin.com.au)

Proof-of-Work (Bitcoin):

a consensus mechanism used by Bitcoin.

This mechanism assumes “no trust” since anyone can participate in the network and can get the right to update the public ledger. For this reason, the mechanism requires nodes to prove they have done work to receive the right to add new transactions to the blockchain. The work is energy intensive, as it involves the nodes hashing data through high-performance, application-specific integrated circuit (ASIC) chips. (source: bitcoin.com.au)

The high cost of electricity and the initial capital needed to acquire the appropriate mining hardware makes blockchain networks that use PoW, such as Bitcoin, difficult to join. (source: bitcoin.com.au)

to fork:           

to modify the code

a token:    

a unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders. (source: bbva.com)

Tokens are also a medium of exchange, but with a far more focused purpose. Where coins(like bitcoin) compete in an arena with countless participants due to their largely singular ambition(i.e. digital cash, digital money or a store of value like gold), tokens are a type of instrument that is useful in specific markets or even single businesses. They’re created in a more derivative fashion with an initial token sale (ITS) and built upon an existing blockchain that supports smart contracts like Ethereum. By funding the contract with the more liquid underlying coin, investors receive tokens from the business running the offering. These companies recognize that they can serve customers in a specific niche better by creating a tokenized model, and the tokens are how customers will participate in the service that will eventually be built with this new found capital. (source: cryptocompare.com)

Coinmarketcap.com that specializes in Cryptocurrency Market Capitalizations data, separately categorizes tokens from coins but considers both as cryptocurrencies. As of writing(March 10th, 2018), there are total 1,551 traded cryptocurrencies with total market cap of U$384 billion. (914 Coins U$348Bn vs. 637 Tokens U$36Bn)

Initial Coin Offering (ICO):

An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin (source: investopedia.com)

A new business fund-raising alternative: Instead of a traditional fund-raising round, or even an IPO, companies offer tokens – not shares – to the market, and investors use digital currencies like bitcoin to pay for these tokens. Everything through blockchain. (source: bbva.com)

An ICO, or Token Sale, is an event in which a blockchain project sells a series of tokens to early adopters in exchange of legal tender or cryptocurrency. This means that the blockchain project offers to investors some units of a new cryptocurrency (their token) in exchange against cryptocurrencies such as Bitcoin or Ethereum. (source: blog.icofunding.com)

smart contracts:  

a form of automated contracts that use pre-defined rules to facilitate the exchange of nearly any good or service.

The overarching principle is to increase the transparency of the transaction while reducing fees and allaying the potential for conflict over nonperformance. However, unlike traditional contracts, these contracts have no room for interpretation because all terms are predetermined and automatically enforced by the contract itself. (source:freightwaves.com)

“A smart contract is the simplest form of decentralized automation, and is most easily and accurately defined as follows: a smart contract is a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated.” (source: Vitalik Buterin, 2014, blog.ethereum.org)

autonomous agents:

a device or software system that on behalf of some creator takes information from its environment and is capable of making independent choices. (source: the authors)

“We could describe some autonomous agents as ‘intelligent’ although they lack general intelligence. However, they are not “just computer programs” because they modify how they achieve their objectives. They can sense and respond to their environment over time.” (source: the authors)

dAPPs (Distributed Applications):

digital applications or programs that exist and run on a blockchain or P2P network of computers instead of a single computer, and are outside the purview and control of a single authority. (source: investopedia.com)

For example, a developer can create a Twitter-like dApp and put it on a blockchain where any user can tweet messages. Once posted, no one – including the app creators – can delete the tweets. Editing may be possible by the sender, but the original tweet would be retained forever. (source: investopedia.com)

In this context, the authors assert current centrally controlled platform models such as Uber or Airbnb can be replaced by dApps creating bAirbnb or SUber. (source: the authors)

DAO(Distributed Autonomous Organization) and DAC(Distributed Autonomous Corporation):

If we define corporations as a complex set of contracts and agreements, smart contracts exist without the need for institutional layers that define corporations. (source: investopedia.com)

An organization can be built where all of these agreements are replaced by such smart contracts, and in essence the corporation will exist entirely as an entity on a blockchain. As such it will be a decentralized organization, existing across all the nodes of the network. Although the use of artificial intelligence could augment the abilities of such an organization, AI is not a necessary requirement for a decentralized autonomous organization to function. (source: investopedia.com)

A DAO would be in the business of generating economic profits if it were structured as a corporation (DAC), and it could raise capital through crowdsales of tokens directly to the blockchain, akin to shares in a public company. Token holders would be entitled to their share of profits in the form of dividends, and could vote on the direction of the company. Those tokens could also trade on a secondary market (also on the blockchain) for people to buy and sell them at will. (source: investopedia.com)

The authors term it as DAE(Distributed Autonomous Entities).

Unfortunately, Ethereum’s DAO launching in April 2015 was scarred by hacking of $3.6 millions of ether out of total $160 million worth of ether raised from 11,000 investors. Some have called it the biggest crowdfunding project ever. (source: http://www.cbc.ca) 2

This hacking incident ultimately led to a hard fork, creating Ethereum Classic also splitting community. (source: https://www.cryptocompare.com) 2

permissoned blockchain:

private blockchain

permissionless blockchain:

public blockchain

cryptography and cryptocurrency:

Cryptography refers to the use of encryption techniques to secure and verify the transfer of transactions. Cryptocurrencies are digital or virtual currencies that are encrypted (secured) using cryptography. (source: masterthecrypto.com)

altcoins:

Alternative cryptocurrency coins. Altcoins simply refers to coins that are an alternative to Bitcoin.

There are two categories of altcoins: One is built upon Bitcoin’s original open protocol, whereas the other is not: they created their own blockchain and protocol that supports own native currency. (source: masterthecrypto.com) 3

The majority of altcoins are a variant (fork) of Bitcoin, built using Bitcoin’s open-sourced, original protocol with changes to its underlying codes, therefore conceiving an entirely new coin with a different set of features. Examples of altcoins that are variants of Bitcoins codes are Namecoin, Peercoin, Litecoin, Dogecoin and Auroracoin. (source: masterthecrypto.com)

There are other altcoins that aren’t derived from Bitcoin’s open-source protocol. Rather, they have created their own blockchain and protocol that supports their native currency. Examples of these coins include Ethereum, Ripple, Omni, Nxt, Waves and Counterparty. (source: masterthecrypto.com)

A commonality of all altcoins is that they each possess their own independent blockchain, where transactions relating to their native coins occur in. (source: masterthecrypto.com) 

distinction between altcoins and tokens:

The main difference lies in their structure; altcoins are separate currencies with their own separate blockchain while tokens operate on top of a blockchain that facilitates the creation of decentralized applications. (source: masterthecrypto.com) 3

distinction between digital currency and virtual currency:

A 2016 working paper by the International Monetary Fund distinguished digital currency (legal tender that could be digitized) from virtual currency (non-legal tender). Bitcoin is a cryptocurrency, or a kind of virtual currency that uses cryptography and distributed ledgers (the blockchain) to keep transactions both public and fully anonymous. (source: project-syndicate.org) 4

__________________________________________________________________________________________

1.

http://www.cryptoninjas.net/2018/01/19/ethereum-proof-stake-implementation-launched-applicature/)

2.

http://www.cbc.ca/news/technology/ethereum-hack-blockchain-fork-bitcoin-1.3719009

(August 29, 2016)

https://www.cryptocompare.com/coins/guides/the-dao-the-hack-the-soft-fork-and-the-hard-fork/ (20 Mar 2018)

3.

https://masterthecrypto.com/differences-between-cryptocurrency-coins-and-tokens/

4.

https://www.project-syndicate.org/commentary/bitcoin-cryptocurrencies-monetary-risk-by-andrew-sheng-and-xiao-geng-2017-08


Photo credit: https://medium.com/@edzob/blockchain-is-a-super-powerful-placebo-399b6d7559a1

 

One thought on “BLOCKCHAIN REVOLUTION [Intro/9] – Terminology

  1. Pingback: BLOCKCHAIN REVOLUTION – How the Technology Behind Bitcoin Is Changing Money, Business, and the World (Part 1) | Leading by Reading

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s