Cryptocurrency is now seen as an investment, a possible protective asset, and even as a paycheck in metaworlds – digital worlds in which you can create avatars, play, store, and communicate. All of these systems are supported by blockchain technology. What this system is and how it works, tells Attarius Network development director Pavel Fedorov
Blockchain is a database with transactions consisting of a successive chain of digital blocks, each block storing information about the previous block and the next. It is a kind of digital notebook in which entries are immutable thanks to a hashing mechanism – a unique set of alphanumeric characters where a change in one character causes a change in other blocks. The main advantage of the blockchain is its transparency, because everyone can read the information inside the blocks, but no one can change or destroy it.
Officially, the history of “blocks and chains” begins on October 31, 2008, when someone under the pseudonym of Satoshi Nakamoto mentioned blockchain in a white paper about the first cryptocurrency network – bitcoin. The basic principles of using decentralization and immutability to record documents were laid as early as 1960-1970, but the closest to them can be attributed to the work of scientists Stuart Haber and W. Scott Stornett, who in 1991 described a scheme of sequential creation of blocks that contain a hash. The technology was even patented, but became a Da Vinci helicopter for its time – there was no technical possibility to implement the idea, and interest in it disappeared. The patent expired in 2004, just four years before Satoshi and his white paper.
How blockchain works
Blockchain is a distributed data ledger system accessible to everyone on that network. For example, a digital currency based on blockchain can be created, moved and stored outside the purview of any government, financial institution or personal lawyer, but nonetheless every transaction is recorded on the blockchain and is public. It is a kind of Ariadne’s thread, a breadcrumb and navigator that leads anyone wishing to check transaction information.
Blocks are added to the network through a mining procedure. For each new block, the miner receives remuneration, which forms the financial basis of his activity. After the first transaction is made, it must be confirmed by several participants in the network – this is the essence of blockchain decentralization without specific intermediaries. This means another advantage of blockchain over the classical financial system – unlike banks, blockchain operates around the clock and does not depend on the central bank of a particular country.
In 2014, it was reportedly possible to mine up to 1-2 bitcoins just on an ordinary computer at home, but to mine the same amount of bitcoins now, you need to tame complicated math and find hundreds of video cards located in a single data center, also called a mining farm. Since miners want to earn more, they tend to buy as many specialized video cards as possible, on which they can mine more efficiently than on a conventional home computer, albeit a powerful one. The shortage of chips that are used in video cards influenced miners to buy up gaming video cards in 2021, which raised the prices of Nvidia and AMD GPUs on the secondary market by two to three times.
The first algorithm for mining, including bitcoin, was called Proof-of-Work. It required a lot of computing power, which was provided by computers. That is why blockchains with Proof-of-Stake algorithms have now started to appear, where it is not machines but validators – members of the network responsible for its integrity and confirmation of all transactions that take place in the blockchain.
P-o-W requires a lot of electricity, expensive and rare specialized equipment. To become a P-o-S validator, one must have some number of coins from this network, pledge them, that is, “create a stake,” and put special software. Validators are rewarded by confirming transactions. The most prominent example of using the P-o-W algorithm is the Bitcoin network, while an alternative can be considered the Ethereum network, which, although it started out using the P-o-W algorithm, is in the transition to the P-o-S algorithm.
Types of blockchain
Blockchain can be a public network that anyone can connect to, or it can be private, usually used by organizations to avoid losing sensitive data. The very first public blockchain was the bitcoin network, followed by other public networks, such as Ethereum, which was launched in July 2015 by Vitalik Buterin of Russia.
After a while, the corporate sector also turned its attention to blockchain. The R3 consortium, which includes, for example, the US exchange Nasdaq and the Irish IT giant Accenture, created the Corda blockchain, which has started to be used mainly in the financial sector. IBM’s Hyperledger blockchain has begun to be used, for example, in the entertainment sector, reducing counterfeiting and resale of event tickets, or in health care, to give access to patient data on the one hand and prevent its leakage on the other.
IBM customers find it much easier to work with a proven vendor like IBM, which is why Hyperledger is very popular among major corporations. Private blockchains are usually faster and cheaper, and all corporate data and transactions are held by a limited number of network participants. Admittedly, this leads to a much easier “collusion and cheating” system within a private network and a much harder time interacting with another network. So when it comes to transparency and sustainability, everyone chooses the blockchain that serves their purposes.
Where blockchain is used
Blockchain is needed where speed and reliability of data transfer are important – that is, in virtually every area of our lives: in smart contracts for the supply of goods, in checking the results of electronic voting, or in the operation of any cryptocurrency, such as bitcoin.
Any cryptocurrency – from bitcoin and etherium to meme coins like Dogecoin – operates on the blockchain. Cryptocurrency is more often used to make money from increased volatility, some of the coins can double in value in a week, but the strategic plans of visionaries see it as a tool for mass money transfers. There are already many attempts to introduce, for example, bitcoin in retail – in some places you can even use it to buy a bag of milk in a supermarket or a glass of beer in a bar, then there will be a legendary “bitcoin accepted” sticker at the entrance.
Classic financial giants such as PayPal and Square are also expanding their cryptocurrency services. Coinbase, a startup that allows people to buy and sell cryptocurrencies, went public last April and is now valued at $47 billion. Among the world’s largest banks, the most progressive in terms of blockchain has long been JP Morgan, which back in 2017 developed its Quorum blockchain based on Ethereum.
Some states are launching pilot projects to create digital currencies that work on blockchain. So far, the most successful has been China, where tens of thousands of people have been credited with a digital yuan that can be used to pay at retail outlets and make transfers. If such an experiment is successful, the digital yuan will appear in the country’s largest economic hubs, such as Shanghai.
Many jurisdictions have similar digital currency projects, including the U.S., Russia and the European Union. Singapore, despite its rather strict legislation on the crypto industry, is also planning to launch its own digital currency.
Thanks to smart contracts, blockchain can track the entire supply chain and verify the authenticity of, for example, coffee beans – where and by whom they were grown, how and when they arrived at the supermarket counter. This helps you completely rule out counterfeiting, know the freshness of the bean, and even verify that its production complies with your ethical and moral values.
One of the most popular crypto-assets of 2021 was NFTs (non-interchangeable tokens) in the form of digital art, which could be purchased on marketplaces like OpenSea, Rarible, etc. Simply put, an NFT is a certificate that confirms your rights to digital art: photos, paintings, music, and even gifs. Trade volumes of such NFTs have grown to billions of dollars, according to various forecasts, the NFT sector will reach about 20% of the entire cryptoindustry capitalization by 2025.
Another area of blockchain that is conquering the world is GameFi, classic online games on the phone or computer that record everything that happens in the game in transactions on the blockchain and also establish a new play-to-earn (play to earn) economy. One prime example is the Vietnamese-Philippine game Axie Infinity, where you have to train fictional monsters and fight them to earn real money. These game mechanics gave the average Vietnamese and Filipino the opportunity to earn unprecedented amounts of money, up to $1,000 a month, and get on with their lives.
Among the companies dealing with full-fledged implementation of cryptoeconomics and in-game NFT in games, there are such companies as Enjin and Attarius Network. These companies aim to conduct a kind of acceleration program for game developers, providing them with everything they need – funding in the form of grants and direct investments, technical and marketing consulting, development and implementation of cryptoeconomics in games, connection to the leading graphics engines Unity and Unreal engine, on which the largest game companies have already created dozens of masterpieces.
Disadvantages of blockchain
Like everything new, blockchain provokes heated debates between conservatives and visionaries.
Among the main disadvantages of blockchain is the strained relationship between regulars and mass users. Crypto old-timers call newcomers hamsters and lemmings, hoping to get rich running amok in the cryptocurrency wheel, without going into the philosophy of the concept. Until now, even the most mundane things remain understood mostly by geeks. Buying, storing and selling cryptocurrency is presented as an attraction for the uninitiated, not to mention the legal status of cryptocurrencies, which is constantly changing. Without enough experience, you can simply forget your wallet password and lose your digital coins forever.
Despite the fact that cryptocurrency has no “master” in the form of central banks, regulators try to control the cryptoindustry in their jurisdictions and make its activities understandable. However, there are sad examples in the pursuit of systematization. For example, China completely banned cryptocurrency on its territory in 2021, including for investment purposes. Over-regulation is justified by the fact that even in public blockchains, all transactions are between anonymous users. And while the cryptocurrency path can be computed, it is almost impossible to identify the owner of the wallet. Especially when so-called barter occurs: the buyer gives the seller cryptocurrencies by regular transfer, and the seller gives the buyer real money. This scheme is a tidbit for fraudsters.
Naturally, this does not please regulators, who are trying to take measures to massively implement KYC (know your client) processes – identification before a person conducts transactions – and AML (anti-money laundering) – anti-money laundering. This is desperately opposed by Satoshi adherents, who argue that any de-anonymization goes against the very spirit of blockchain. Hence, the main disadvantage of public digital currencies is their centralized nature, which means that the Central Bank can shut down the wallets of citizens it does not like.
On top of that, cryptocurrency is highly volatile. Today, the capitalization of the entire cryptocurrency market is about $2 trillion, although last November this figure exceeded $3 trillion. To reduce the volatility of cryptocurrencies came up with stabelcoins, such as Tether (USDT), which provides its capitalization of $78 billion. However, it also becomes an object of skeptics who doubt that these dollars really exist.
Yes, blockchain is still periodically threatened by technological crises, tighter regulation in certain countries, and crypto pyramid scammers. But blockchain’s introduction into the real economy, albeit so far in its digital part, has taken place. Commercial banks are already imagining how they will lose some of their seemingly eternal role as intermediaries. The government, for example, will directly transfer pensions, benefits, and any other types of remittances, as well as give a favorable interest rate, bypassing banks.
The gaming industry, in the form of GameFi, already has an estimated 1 billion to 2 billion people who have at least once installed a blockchain game and played it. By 2025-2027 it is expected to grow to 3 billion players, with many more active players among them. Through the hype around NFT and metaclasses with the game element, major consumer brands such as Audi, Adidas and Ralph Lauren have come into the blockchain industry. So 2022 will see the real development of web3 (the concept of decentralization of the Internet) and digital worlds.
The market for decentralized finance (DeFi) is developing rapidly and could compete with the classical banking offerings. People are already investing in new types of digital assets, such as security tokens and digital art in the form of NFT. DeFi tools already have more than hundreds of billions of U.S. dollars concentrated in them. This success will inevitably lead to a staffing shortage in large organizations, which will be looking for blockchain specialists and programmers who know the C++ language used in networking.