What is a blockchain....no what is it really?
A first principles approach to what blockchains actually are.
Shouldn’t we know what a blockchain is?
Honestly, I sort of knew, but I didn’t really know. I could rhyme off a technical answer with a bunch of buzzwords to sound smart…spoiler; I’ll do that in a minute. But I didn’t really understand what it is. Lured by tantalizing innovation and overnight crypto millionaires, I jumped ahead to learn about the latest hype. Out of place and confused, I returned to the basics; first principles understanding of what a blockchain actually is.
After lots of research, it’s still hard to define. I’ll explain why. But I’ve got a better understanding. Let me share that with you.
Let’s get technical
A blockchain is a transparent, immutable, decentralized ledger recording transactions. That’s a buzzword bomb, so I’ll break it down. Transparent because anyone can view all historical transactions. Immutable since no one can change the transaction record. Decentralized because no central authority controls it.
Blockchains have native tokens to govern and incentivize behavior. The Bitcoin blockchain token is bitcoin. The Ethereum blockchain token is ether (eth). There are plenty of other blockchains with their own native tokens.
How we use blockchains will define what they actually are
Blockchains are a lot of things and even more potential things, which makes it confusing. It’s like trying to define the internet in the 1990s or smartphones in the 2000s. It’s new and evolving so rapidly making it hard to specifically define.
What a blockchain is, will be determined by how we use it. Much like how we use the internet has defined what it actually is. Today, we use blockchains as a computer, a network, an asset and the value layer of the internet.
Programmable blockchains, the likes of Ethereum, Solana, Avalanche, using smart contracts are the forefront of innovation and the focus of this piece. Bitcoin is not. It is not a programmable blockchain.
I focus on Ethereum because it is the first and largest programmable blockchain. Newer blockchains are derivatives of Ethereum.
So what really is a blockchain?
Programmable blockchains are used as a computer to compute and store data, a network to connect its participants and blockchain tokens are an asset and the value layer of the internet. Simply a blockchain is:
The value layer of the internet
1. A computer
Blockchains are advanced computers known as “state machines” meaning they read a series of inputs and, based on those inputs, will transition to a new state. a16z Crypto Partner, Chris Dixon defined a blockchain as:
A virtual computer that runs on top of a network of physical computers that provides strong, auditable, game theoretic guarantees that the code it runs will continue to operate as designed.
A blockchain computer is different from a traditional computer in so far as who is in charge. The code is in charge of a blockchain computer. Humans are in charge of traditional computers. Blockchains provide a guarantee that the code will continue to run as it was programmed. That is an enormous technological breakthrough because for the first time in history, a blockchain computer can run autonomously governed by its own code instead of by people. As a result, blockchain computers can be trusted in ways human controlled computers and organizations cannot.
Bitcoin was the first blockchain computer and created a specific set of guarantees. Ethereum is the first general purpose programmable blockchain that can be programmed for virtually any applications.
2. A network
Blockchains are a global network of validators, developers and users.
Validators: maintain the integrity of a blockchain by ensuring transactions are correctly inputed.
Developers: build applications on blockchains, called decentralized apps (dapps). Dapps have been developed in finance to facilitate buying and trading assets, direct payments, lending and borrowing. In the arts for creators to share and monetize their work. In governance to organize people to work toward a goal.
Users: use the dapps built.
Blockchains are networks of people interacting through code. They are decentralized networks because no one entity is in charge.
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3. An asset
Blockchains issue native tokens to pay validators for maintaining the integrity of the blockchain. Contributors are issued tokens as reward for developing the network. Token ownership is used to govern the network. Tokens, like eth, are assets.
Robert Greer posits in What is an Asset Class, Anyway? that there are three asset class types:
In 2019, David Hoffman cleverly pointed out in Ether: A New Model for Money that eth is the only asset to transcend all three classes.
Eth is a capital asset, much like an equity. Owning eth is a share in the Ethereum network, which gives the owner a claim on transaction fees and an ability to validate the network. Additionally, when eth is staked to validate transactions, more eth is earned making staked eth a productive asset.
Eth is a consumable / transformable asset. Eth is “burned” meaning it is consumed in the process of validating transactions, just like iron ore is smelted in the process of making steel. Anytime anything happens on Ethereum, eth is consumed.
Eth is a store of value because it is used as collateral to secure a loan.
(Technically, these three asset attributes will be present in eth after Ethereum converts from Proof of Work to Proof of Stake…but that’s topic for another post.)
4. The value layer of the internet
The internet heralded a new wave of communication. Blockchains heralded the value layer of the internet. Tokens are the native asset of the internet enabling the creation, store and transfer of value natively online.
We’re moving into a world where, as Packy McCormick said “the internet is owned by its builders and users orchestrated with tokens.” Property rights are a prerequisite for ownership. In the world of blockchains, these rights come in coded contracts on an immutable, transparent and decentralized blockchain.
What other alternative is there? What authority could regulate ownership of assets on the internet? The United Nations, United States, China? None would be impartial. There is no sovereign that reigns supreme over the internet. The internet does not belong to any country. Fiat currencies are beholden to domestic monetary and fiscal policies. Internet ownership needs to be self governed and therefore, needs its own native asset. The native tokens of Ethereum, Solana, Bitcoin, Avalanche and others are vying to be the native value layer of the internet.
A cultural phenomena
Blockchains, tokens and digital assets are the building blocks of the emerging third era of the internet.
The commonality between the three eras of the web is that it is an integral part of our culture. In all eras the web:
Informs social behavior
Alters political landscapes
Pioneers new art forms
Blockchains today are influencing these four vectors. The blockchain ecosystem has created $2 trillion of value by innovating new forms of commerce and content monetization. Blockchains, facilitated by Decentralized Autonomous Organizations, are enabling new ways for people to organize, govern and achieve a common goal. Blockchain is increasingly relevant at all layers of government. Blockchains, through Non-Fungible Tokens, have pioneered a new medium and monetization for the arts.
Blockchains are trail blazing cultural phenomena encapsulating the worlds of art, music, finance and politics. Fun uses cases, like collecting digital artifacts through NFTs and earning tokens playing video games, are catapulting blockchains to the mainstream. These use cases may be foolish over hyped fads, but they are transformational. They are onboarding millions of users into blockchain networks, drawing talent of all types to the ecosystem and attracting capital. Users, entrepreneurial talent and capital is the recipe for breakthrough innovation.
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