2021 is the year blockchains evolve from brilliant breakthroughs on the periphery to the Internet of many blockchains. Bitcoin blockchain electrified its ardent fans but found few uses. The initial innovations will become the security nucleus of the decentralized Internet of Blockchains or Web 3.0. The groundwork for Web 3.0 will prepare the way for explosive growth in decentralized applications.
Bitcoin created the epochal peer-to-peer security model which, together with Ethereum smart contracts, allow individuals to secure their data and privacy. Peer-to-peer blockchains safeguard data by limiting access to individuals who prove their trustworthiness with proof-of-work. Collective vigilance by all members, who cross-check data on a distributed ledger, prevents tampering with the data.
Individuals can use Ethereum smart contracts to control data flow by selectively granting access to their information. Neither Bitcoin nor Ethereum can scale for mass adoption. However, they are unmatched in securing data and keeping it private and that will remain the kernel of the emerging, secure Web 3.0. (Read also: What role will blockchain play in Web 3.0?)
The Future of Blockchain
Unsurprisingly, the value of both Bitcoin and Ethereum coins has skyrocketed. The prospect of an Internet of Blockchains comes at a time when increasing numbers of users distrust the centralized Internet. Big Tech oligarchs use aggregated data of individuals as levers to create barriers to entry for emerging competitors. Hackers threaten the security of the critical infrastructure by stealing data with impunity.
The decentralized Internet of Blockchains distributes the power of information to individuals and communities, removing the honeypots of large data stores that attract hackers. Gavin Wood, a pioneer of Web 3.0 and the founder of Polkadot, sums it up with a clarion call, for Web 3.0 to be an executable Magna Carta–"the foundation of the freedom of the individual against the arbitrary authority of the despot."
Brock Pierce, Chairman of the Bitcoin Foundation and an investor in Polkadot, told us: "Work on Web 3.0 has been underway since 2016, and we expect it will come to fruition in 2021."
Existing Blockchains Are Slow
Eligibility for entry into the Bitcoin blockchain requires proof-of-work: demonstrating an ability to crack a cryptographic puzzle, a random number, distinct for each open node on the Bitcoin blockchain. Prospective members need sizable computational resources and electricity to solve the brain teaser. Only a few can solve the puzzles and afford the expense.
A distributed ledger keeps track of any change in the membership and the transactions in the Bitcoin blockchain. Every node is updated similarly with the same data before confirming the validity of the transactions. Inevitably, the transaction speeds slow down as the number of nodes increase. Bitcoin takes 10 min or longer to verify transactions, which results in seven transactions/sec maximum throughput. In contrast, Visa does 2000 transactions/sec on average, with a peak rate of 56,000 transactions/sec.
Ethereum is similarly slow in processing transactions. It could achieve 15-20 transactions a second in 2019. As the number of decentralized applications on the Ethereum network increased, the volume of transactions rose to 77,000 transactions a day, which does not include the exchanges of its coin—ETH. "The constraint to Ethereum is its underlying shared state virtual machine used for multiple purposes with a diversity of software that makes it hard to scale," Billy Rennekamp, grant manager of the Cosmos Network’s Interchain Foundation, told us. Cosmos, which went live on February 18th, 2021, is another network of diverse blockchain.
Proof-of-stake (POS) consensus algorithms are supplementing Proof-of-Work (POW) to scale. They solve what is called the Byzantine Fault tolerance problem, a method of establishing trusted consensus.
Distributed teams cannot have a reliable consensus unless the messages between them are consistent and reliable. It is analogous to generals preparing a battle plan at risk of getting waylaid by a traitor among them who could misinform one of them without the others knowing. To preempt such an outcome, the generals will need consistent written and secured messages to all of them. Unlike POW, POS can be executed with fewer resources and at faster speeds.
Proof-of-stake works in combination with economic incentives to discourage cheating. The participants are typically called validators who have skin in the game with their token deposits. Their job is to verify transactions on the core network. Should a transaction turn out to be fraudulent or deceitful, they incur financial penalties (slashing). Conversely, the validators benefit from the network's overall growth and the fees they earn from verifying transactions.
The Rise of Parachains
Sharding is one way to scale networks and is used prominently by the Polkadot network of blockchains. With sharding, the relay chain is the core of a secure, shared chain, interlinked with multiple blockchains (parachains). Each of the parachains specializes in one type of application. Validators verify the transactions emanating from the Parachains before storing them on the relay chain. Relay chains use multiple methods to guarantee their security. (Read also: Why Data Scientists Are Falling in Love With Blockchain.)
Nominated proof of stake is a distinctive aspect of their safety but not the only means. Validators on the relay chain have a vested interest with their stake deposits, with additional contributions from those who nominate them. Both incur penalties for malicious, dishonest, or incompetent behavior. Additionally, the security of blocks, each containing the encrypted data of individual parachains, verified by collators, is confirmed by a super-majority vote of validators, at a minimum of fourteen, representing the blocks using the GRANDPA protocol.
The subsequent addition of blocks triggers another round of voting and approval by a super-majority. "Fishermen'' watch the validators and keep an eye on collusion among them and other malicious behavior and are rewarded when they spot them. Some of the validators are assigned the job of watching the validators voting.
We spoke to Ingo Rübe, the founder and CEO of BOTLabs, a company developing the KILT Protocol for digital identity, and is partnering with Polkadot, where it will be one of the Parachains. "Today, companies express a keener demand for digital identity, especially those investing in the Internet of Things or offering on-demand services on the cloud and even for people. Digital identity for an IoT device is not simply an identifier but also associated attributes such as their compatibility with other devices and their compliance with regulations," Rübe told us.
"The Ethereum platform would not serve our purpose well because of its price swings with fluctuations in demand. Since the Ethereum servers are committed to several different services, they are prone to congestion and don't scale well to match demand," Rübe tsaid. "Polkadot, parachains by contrast may define a stable price for transactions," Ingo Rübe explained.
“Parachains retrieve the mathematical truth from the Polkadot Relay Chain. This means they can operate cheaply and with predictable transaction costs while still having the advantages of a permissionless blockchain like Bitcoin orEthereum. On the upside, Polkadot will have several Parachains which might want to use our digital identity solutions. We provide the technical mechanisms to issue, store, discover, and retrieve credentials that attestors prepare," says Rübe.
Proof-of-stake works in combination with economic incentives to discourage cheating. The participants are typically called validators who have skin the game with their token deposits. Their job is to verify transactions on the core network. Should a transaction turn out to be fraudulent or deceitful, they incur financial penalties (slashing). Conversely, the validators benefit from the network's overall growth and the fees they earn from verifying transactions.
Cosmos network takes a different approach, which leaves each of the blockchains autonomous with their security apparatus. An Inter-Blockchain Communications Protocol (IBC), a TCP/IP Internet-like network, interlinks multiple blockchains to allow for exchanges of tokens across blockchains.
Each of the blockchains is application-specific and not shared to make them scalable. The Cosmos ecosystem has 200 blockchains; at least 70 are in the main net, and the rest are in either the development or pilot stage. Cosmos Network is complemented by the Cosmos SDK for applications development, Cosmos hub with the chain registry for discoverability and routing, and Tendermint for building consensus mechanisms and network interlinking.
"Tendermint provides the means to implement a Byzantine tolerant consensus mechanism within individual blockchains and across them. It can implement vertical and horizontal scalability. Vertical scaling increases the number of nodes on a single blockchain with thousands of transactions. The binding constraint with vertical scaling is the underlying state machine. We made changes in the state machine, which increased the capacity 10X, but it has its limits," Rennekamp told us.
Horizontal scaling becomes possible with IBC, and shared security becomes possible with interchain staking; its specs will be launched in Q4. "IBC interconnects multiple blockchains, each of them has their security system connected with others by validators who could operate on one or more blockchains," Rennekamp explained.
The boom in decentralized applications is the rationale for scaling. In 2020, decentralized applications (composed primarily of decentralized finance (DeFi)—with the top 10 DeFi applications accounting for 87% of Ethereum transaction volumes,)grew from $21 billion in 2019 to $270 billion in 2020. Ethereum gas prices zoomed as it was not able to scale to meet demand. (Read also: If dApps Are the Next Big Thing, We Need the Right Platforms.)
There is scope for adding entirely new categories of applications ranging from supply chain to social applications. The Cosmos network, for example, is pioneering social applications that make innovative uses of blockchains. "One of them is the Akash, an education project in India, which will compensate private developers of education projects with money contributed by the Indian Government," Rennekamp told us.
We spoke to Melanie Nuce, Senior Vice-President of Corporate Development at GS1 US. She is involved in a pilot project testing data traceability for food supply chains, specifically seafood, including experimenting with the integration of blockchains for greater security and protection against tampering.
Supply chains with multiple partners generally have installed disparate systems. "Our proof-of-concept included solutions utilizing Hyperledger Fabric, Multichain Corda, and even a database. We abstracted the data from the storage layer using the GS1 Standards-based model and a GS1 API. For example, the EPCIS standard provided a consistent format for sharing event data, such as whether a product had been shipped, received, packed or transformed," she explained the background of the project.
"For blockchains to be widely adopted, they will need to interoperate with different systems at trading partners and enable permissions, privacy and access controls. Mechanisms are needed for the secure and selective exchange of data among the members of the supply chain, regulatory bodies, and business partners," Nuce told us. "Currently, it is even hard to transfer data between the same blockchain sitting on two different cloud platforms," she added.
"Businesses need data formatted to meet regulatory compliance requirements and contractual obligations, which include keeping some data confidential," Nuce revealed. "We are demonstrating that standards help capture and share data in an ecosystem that blends legacy systems with a realistic adoption curve for blockchain," Nuce concluded.
The Internet of Blockchains has been laying the foundations of a large market of decentralized applications. Much of it is untested and certainly will undergo stress tests before it is widely adopted. Blockchains will iron out many details before they are compatible with business processes. However, there is no doubt that decentralized applications will flourish because they save costs by removing intermediaries in transactions and meeting the hunger for security and privacy that was long neglected by the Internet as we have known it thus far.