Some Keyword Surrounding To Blockchain Industry
Here are some common keywords that are often used in the Blockchain industry:
Initial Coin Offering (ICO)
The process by which blockchain startups offer investors units of a new digital token or cryptocurrency in exchange for cryptocurrencies like Bitcoin or ether. First held in 2013, this method became the rage in 2017, and accelerated in 2018 as the primary way to fund the development of new cryptocurrencies. The pre-created tokens are then sold and traded on cryptocurrency exchanges if there is a demand for them.
A crypto exchange allows its clients to trade cryptocurrencies with each other or in exchange with regular fiat currencies (a government-issued currency that is not backed by a commodity such as gold). The crypto exchanges set the exchange rates for the various tokens and currencies based on the actions of their sellers and buyers, as well as on the wider market rates on other exchanges as well. However, there can be other factors affecting the price on a particular exchange, since there is no regulatory oversight at all. Exchanges charge a commission on intra-crypto trades and typically a higher fee on crypto-fiat exchanges.
Crypto Wallets (Hot and Cold)
A cryptocurrency wallet is a software program that stores private and public keys and interacts with various blockchains to enable the user to transact with different digital currencies. The wallet software has embedded commands that allow these transactions with each cryptocurrency having its own unique address and commands.
A Hot Wallet holds the private and public keys in storage even as it remains connected to the internet. Hence these are susceptible to cyberattacks or theft. Hot wallets can be computer-based, mobile-based or cloud-based software programs.
A Cold Wallet, on the other hand, is much more secure as it stores the keys offline. It is only when the user wishes to transact with those currencies that the wallet needs to be connected to the internet. These can be independent hardware devices with robust security features which need to be put online through a computer when transacting.
The second-generation public blockchain that, unlike the Bitcoin blockchain, focuses on running decentralized programs called Smart Contracts. Miners work to earn ether, the cryptocurrency token that fuels the network and used by application developers to pay for transaction fees and services on the Ethereum network. There is a second type of token that is used to pay miners fees for including transactions in their block, called gas, and every smart contract execution requires a certain amount of gas to be sent along with it to entice miners to put it in the blockchain.
The topmost layer of the blockchain network where a distributed application resides and executes. Bitcoin’s scripting language enables us to write a script that is recorded with each transaction, allowing us to encode rules to communicate on the blockchain and build applications. Similarly, Ethereum has the Ethereum Virtual Machines (EVM) and its own scripting languages to code applications called Smart Contracts on the blockchain. Hence the complete stack may be viewed as:
- Application (application layer)
- Token (reward layer)
- Protocol (communication layer)
- Blockchain (database layer)
Ethereum Virtual Machine (EVM)
The Ethereum protocol processes transactions and smart contracts using what is called the Ethereum Virtual Machine (EVM). Every node that is participating in the Ethereum network runs the EVM, and hence it is computationally intensive. To compensate for this, and to incentivise the nodes (or miners), the protocol allows the miners to charge a small fee referred to as gas.
Transactions originate from externally owned accounts, whereas messages originate from contract accounts. Both transactions and messages are objects containing a particular quantity of ether, an array of data, the address of the sender, and a destination address. For transactions the destination address can be either another contract account or an external account, whereas for a message it can only be another contract account. Hence messages allow contracts to call one another.
Anyone can trigger the execution of a smart contract by sending an ether transaction to the corresponding contract account. When a contract receives a message, it has the option of returning a message to the original sender just like a standard computer function.
The price of gas is not fixed but is dynamically adjusted by miners based on the market price of ether. Because all active nodes on Ethereum run the code of every smart contract, the code is not controlled by—and cannot be halted by—any single party. A smart contract thus operates like an autonomous agent, automatically reacting to inputs received from externally owned accounts or other smart contract programs executed on the network.
Proof of Stake (PoS)
Proof of stake is an alternative process for transaction verification on a blockchain. Unlike the proof of work system, in which the user validates transactions and creates new blocks by performing a certain amount of computational work, a proof of stake system requires the user to show ownership of a certain number of cryptocurrency tokens. Blocks are not “mined”. In most cases, a fixed number of tokens are created at launch and transaction fees are paid for adding blocks.
In order to validate transactions and create blocks, validating nodes must first put their own tokens at ‘stake’. If they validate a fraudulent transaction, they lose their token holdings, as well as their rights to participate in the future. Once the stake is put up, nodes can partake in the process, and because they have staked their own money, they are incentivised to validate the right transactions.
This system does not provide a way to handle the initial distribution of coins at the founding phase of the cryptocurrency, so cryptocurrencies which use this system either begin with an ICO and sell their pre-mined coins, or begin with the proof-of-work system, and switch over to the proof-of-stake system later.
Delegated Proof of Stake (DPoS)
In a Delegated Proof of stake process for transaction verification on a blockchain, all nodes vote to elect a limited number of nodes who they trust to validate transactions on their behalf. This speeds up the consensus mechanism without sacrificing decentralisation. The voting is an ongoing process and the elected nodes can be replaced anytime if the others deem them untrustworthy. Like in PoS processes, loss of income and reputation act as incentives against malicious behaviour.
ERC20 Token Standard
Ethereum can be used as a platform to launch other cryptocurrencies on the back of its ERC20 token standard. ERC20 has emerged as a significant Ethereum token and is used extensively in smart contracts. Other developers can issue their own versions of this token and raise funds though ICOs.
ERC721 Token Standard
Ethereum has also created the ERC721 token standard for tracking unique digital assets, such as digital collectibles, and allows for people to prove ownership of scarce digital goods.
Decentralised Autonomous Organisations (DAOs)
Ethereum can also be used to build Decentralized Autonomous Organizations (DAO). A DAO is a fully autonomous, decentralised organisation with no single leader. DAO’s are run on a collection of smart contracts written on the Ethereum blockchain. The code is designed to replace the rules and structure of a traditional organisation, eliminating the need for people and centralised control. A DAO is owned by everyone who purchases tokens, but instead of each token equating to equity shares & ownership, tokens act as contributions that give people voting rights.
Distributed Ledger Technologies
Distributed ledger technology uses independent computers (nodes) to record, share and synchronise transactions in their respective electronic ledgers, instead of keeping data centralised on a server as in a traditional ledger. The blockchain is one example of this technology.
Now that we are accustomed to common keywords of blockchain technology. In the next unit, let us now understand Bitcoin, which is one of the most popular cryptocurrencies of all time.