Besides running highly successful companies like SpaceX and Tesla, Elon Musk somehow has time to focus on the cryptocurrency world. This is definitely apparent from his Twitter feed. Oh, and of course, during early 2022, he bought 9% of the company and attempted a takeover!
Some of his tweets are comical – but the world pays close attention. When Musk posted a shiba inu puppy image on Twitter, the altcoin called shiba inu spiked. He also had a major impact on dogecoin. This is a cryptocurrency that actually started as a joke.
Here’s what he tweeted about it: “Lots of people I talked to on the production lines at Tesla or building rockets at SpaceX own Doge. They aren’t financial experts or Silicon Valley technologists. That’s why I decided to support Doge – it felt like the people’s crypto.”1
In May 2021, Musk was the guest host on Saturday Night Live and his performance garnered mixed reviews. But he did mention dogecoin, saying it was a “hustle.”2 The price of the cryptocurrency plunged nearly 30%.
No doubt, the crypto world is wild and volatile. But it is becoming mainstream. And Musk is one of the main influencers. Although, this certainly has its downsides. Musk is facing lawsuits, such as for his alleged manipulation of dogecoin. Tesla also sold a large amount of its Bitcoin holdings.
Regardless, the core blockchain technology for crypto is relatively new. There continues to be much evolution and change. Thus, for entrepreneurs looking at Web3, you need to have a solid understanding of the core blockchain technology. You will also need to keep up with some of the emerging alternative platforms.
In this chapter, we’ll get an overview of them.
The Origins of Blockchain
To understand blockchain, it is important to get an overview of some of the major technology developments that led to its creation. This will provide context and an understanding of why blockchain is so powerful and unique.
First of all, you need a backgrounder on databases. They were a critical technology in the early days of mainframe computers. They allowed for storing, accessing, deleting, and updating information. They were essential for managing applications, such as handling a company’s payroll or calculating the rocket paths for the Apollo program.
It was during the 1970s that the database technology saw a major innovation. This was the relational database. It was based on storing information in tables – which had columns and rows of data – that you could use a relatively easy language, SQL (Structured Query Language), for managing them. IBM researcher E. F. Codd invented this technology. But interestingly enough, his employer was lukewarm on its potential. The belief was that relational databases could not scale for large enterprises. Although, the main reason may have been that IBM did not want to cannibalize its existing database business, such as for IMS.
Computer engineer Larry Ellison read Codd’s work and was intrigued. He believed that this was the future of the database industry. To capitalize on this opportunity, he cofounded Oracle. True, IBM would eventually launch its own relational database, Db2, but it was really too late. Oracle would ultimately become the dominant player in the market.
What’s interesting is that relational databases have not seen much innovation. As a result, startups have taken advantage of this. During the past decade, there have emerged new technologies like NoSQL. Some of the companies in the space have become fast-growth operators, such as MongoDb.
But despite this, databases have certain limitations. They generally rely on administrators. They have certain authorizations and rights to use features and capabilities of the databases. While this usually works, there can be problems. There can be errors or hacks. Or an administrator may even perpetuate the breach.
There are various types of security systems like firewalls. But they are far from foolproof.
But this is where blockchain becomes very intriguing. It is a database – but it is distributed. This means that everyone on the network has access to it. They can see every transaction since inception. There is also no administrator of the database. Instead, the management is based on the efforts of everyone in the network. It is truly decentralized.
Blocks: There are a chain of these, and each block holds data, such as for a currency transaction. When you make a block, the system will make a 32-bit number called a nonce. This is used to generate a block header– and this is a 256-bit number. It is part of the cryptography to allow for securing the data on the blockchain.
Nodes: These are the computers on the blockchain network. The decisions for the network are based on the collective actions of the nodes. They are not the result of a central authority. Instead, nodes will verify where a new block is trusted and verified. They have another advantage – that is, durability. If a few nodes fail, the system will continue to work. By contrast, this would not be the case for a traditional database in a data center.
Miners: With computers, it is easy to copy huge amounts of data. But the blockchain prohibits this. To create new blocks, you need miners. They use sophisticated algorithms to solve math problems to make the nonces that have the right hashes. Some of the ways to achieve this include proof of work (PoW) or proof of stake (PoS). However, it gets more difficult to solve the problem as the network grows because the calculations need to account for all the blocks. When a miner finds the right combination, it is called the golden nonce. The result is that it is very difficult to hack the blockchain. It would require that a majority of the nodes agree to change the blocks to carry out a fraud.
Something else: When a transaction is created, it cannot be changed. This is another form of security.
Over the years, blockchain has proven quite resilient. But the first main test of this technology was Bitcoin.
During the early days of crypto, you could use your home PC to mine coins. But those days are over. Mining is now done with the use of highly sophisticated computers, such as GPUs (Graphics Processing Units). They are known as “mining rigs.” In fact, there are a variety of publicly traded companies that operate mining businesses, such as Marathon Digital Holdings and Riot Blockchain.
Bitcoin
The origins of cryptocurrencies go back to the late 1970s. Academics looked at approaches to create a digital monetary unit based on complex cryptography.
For example, in 1979, doctorate student Ralph Merkle wrote his dissertation about the use of public keys and digital signatures to verify transactions. This became known as the Merkle tree.
Then, by the early 1990s, professors Stuart Haber and W. Scott Stornetta released a paper about how to prevent the manipulation of digital transactions. To help with this, they used Merkle trees.
With this academic research, entrepreneurs started to test the theories. One was David Chaum. He developed a technology that used public and private key systems for digital signatures. He then founded a company, DigiCash, in 1990 to prove his concepts. It relied on the transactions of traditional banks. However, the information about the parties were private. Unfortunately, Chaum could only get a handful of banks interested in the technology and DigiCash would file for bankruptcy in 2002.
During the 1990s, there were other interesting startups that created cryptocurrencies. Examples included Flooz, Bit Gold, and Hashcash. But they would all eventually fail.
By 2008, the situation would prove ideal for the creation of a sustainable cryptocurrency. With the financial crisis, many people were losing trust in the government and financial services companies. Maybe a digital alternative would be better?
Well, Satoshi Nakamoto wrote a pivotal paper. It was called “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Keep in mind that the identity of Nakamoto was not disclosed. He or she may have been one person or a group of persons. But it did not matter. What was important is that Nakamoto’s paper ignited a revolution. Nakamoto provided the basis for the blockchain framework and tested it with the creation of the first sustainable cryptocurrency.
On January 3, 2009, Nakamoto mined the first bitcoin block. This indicated the validity of the technology. For the first transaction, there were 50 bitcoins created – and they have since been called the “Genesis block” or block 0.
Nakamoto then made the Bitcoin software open source. This meant that it was freely available for anyone to download from the Internet. It also allowed any programmer to make changes to the code.
Next, on January 12, 2009, Nakamoto executed the first Bitcoin transaction. He sent block 170 – which had 10 bitcoin – to Hal Finney. The address of the transaction was the public key, which was a long string of numbers. For Hal to access and own it, he had his own private key. Think of this as a complex password.
Note that the transaction involved no intermediaries. There was no bank or government authority to process the transaction and charge a fee. The Bitcoin was sent peer-to-peer and the blockchain handled everything. This meant it was a true decentralized system.
In other words, Bitcoin was instantly global. All you needed was access to the Internet. The network was always open. You could send Bitcoin to someone at midnight on Sunday. It did not matter.
The Bitcoin transaction did not require any personal information, like a Social Security number, address, or even a name. There was only the use of the public and private keys. This meant there was no chance for identity fraud or hacking private information.
Finally, the Bitcoin transaction was added to the public blockchain ledger. This was similar to what a bank would have – except that everyone on the network could see it.
In the Bitcoin code, there is halving. This means that – every four years – the amount of new coins gets reduced by 50%. The next halving will occur in May 2024.
Then did Bitcoin have the characteristics of a true currency? Granted, it was not a fiat currency. This is where a government issues the currency and it is not backed by a physical commodity, like gold or silver. For example, in the USA, the dollar is backed by the “full faith and credit” of the government.
A cryptocurrency also does not have a physical form. There are no paper versions.
Divisibility: This means you can divide the currency into other denominations. For example, you can exchange a 10-dollar bill for 10 one-dollar bills or two 5-dollar bills. Interestingly enough, Bitcoin is more divisible than the dollar. One bitcoin is divided up to eight decimal places and each is called a Satoshi.
Limited Supply: If the government prints too many dollars, then there will be inflation or even hyperinflation. Eventually, people will not accept it because the currency will be worthless. However, in the case of Bitcoin, it has a programmed limit – that is, 21 million units. There are about 19 million in existence today. The estimate is that it will take until 2140 for the 21 million limit to be reached.
Uniformity: A currency needs to be interchangeable. For example, a $10 bill is worth the same as any other one. Then what about Bitcoin? It is uniform as well. The main reason is that the blockchain verification system allows for authenticating each of the transactions.
Portability: You can easily transfer the currency. And yes, this is definitely true with Bitcoin. You can send it to anyone on the network. Like the US dollar, you do not have to use any personal information for a transaction.
Durability: This is where the currency can deteriorate or be destroyed. An example would be US dollars that are burned and can no longer be retrieved. With Bitcoin, everything is on the network. So long as this is maintained, there will be durability.
Acceptability: This means that you can use a currency for many transactions. But for Bitcoin, this is far from the case. The fact is there are only a limited number of places – such as retail or ecommerce platforms – that you can use the cryptocurrency.
While bitcoin has many of the characteristics of a currency, it is still more of a store-of-value or an investment vehicle. It’s become more like a stock or bond. In fact, this is what the IRS considers it to be. And this can cause many complex tax problems. Suppose you buy one bitcoin for $20,000 and it increases to $30,000. You then use this coin to buy a car in the USA. In this situation, you would owe taxes on the $10,000 gain. This would not have been the case if you used the US dollar.
Another problem with Bitcoin as a currency is the volatility. This makes it extremely difficult for businesses to do adequate planning. Let’s say an automotive manufacturer accepts Bitcoin for its vehicles. During the first quarter, it sells 200,000 units at an average of $40,000 each. However, during the second quarter, Bitcoin plunges by 50%. In other words, the car company will report a steep drop in sales – and probably a net loss – even though it may have sold a higher number of cars.
Of course, there are various Bitcoin billionaires. They had the foresight or luck to buy up the cryptocurrency in the early years. In 2010, you could have purchased a Bitcoin for a fraction of a cent. As of 2022, it was fetching over $60,000.
In 2013, Laszlo Hanyecz offered anyone 10,000 bitcoins to deliver two Papa John’s pizzas to him. Someone took him up on this and it represented the first real-world Bitcoin transaction. But in hindsight, it was a bad move for Hanyecz. Had he kept his Bitcoin instead, they would have been worth over $300 million.3
Crypto Exchanges
While the blockchain allowed for a highly secure system, it was far from convenient. In the early days, if you wanted to create a transaction with Bitcoin, you would need to download and use complex software.
But entrepreneurs saw this as an opportunity to create new applications. A big part of this was the development of crypto exchanges. The first one came in 2010: Bitcoin Market. This allowed for the purchase of the cryptocurrency by using PayPal and an escrow system.
No doubt, many other exchanges would soon hit the markets. Examples included Mt. Gox and Tradehill, which allowed for instant purchases.
In 2011, the market would face a severe test – and the Bitcoin market nearly self-destructed. The reason was the hack of the Mt. Gox marketplace. It resulted in the collapse of the price of Bitcoin, which hit nearly $0. Suddenly, there was little trust in cryptocurrencies.
Despite all this, Mt. Gox was able to recover in a few years. The exchange also became the global leader.
Yet the problems would remain for the crypto industry. The US Department of Homeland Security engaged in several investigations and ordered some exchanges to change their practices.
Oh, and the issues with Mt. Gox were far from over. In 2014, the exchange had problems with settling trades. Then there was a bombshell announcement: a hack of over 850,000 Bitcoin.4 While Mt. Gox recovered 200,000 of these, it was certainly not enough. The exchange would file for bankruptcy.
Over the years, there would be other hacks of crypto exchanges. Just some included Bithumb, ShapeShift, and Bitfinex.
Yet the Bitcoin market continued to be resilient. Then again, the early adopters had a high tolerance for risk. They were also big believers in the cryptocurrencies.
But to get mainstream acceptance, the “wild west” ways could not continue. As a result, the industry moved toward more compliance, such as with the adoption of anti-money laundering and counterterrorism financing requirements.
For example, in April 2021, Coinbase became the first crypto exchange in the United States to go public. The initial public offering price was $250, and the shares ended the day at $328.28, bringing the market capitalization to $85.8 billion.5 Not bad for a company that was founded in 2012.
The growth of the company was staggering. During the first quarter, the revenues hit $1.8 billion, up 9X over the past year. The company’s net income soared from $32 million to $730 million–$800 million. There were 6.1 million monthly transacting users (MTUs).
Crypto Wallets
Hot Wallet: This is where you store the cryptocurrency on the exchange. This is definitely easy. However, there can be risks if the exchange has troubles. After all, there is no equivalent of a Federal Deposit Insurance Corporation (FDIC) to back any lost cryptocurrency, as is the case with your deposits at a traditional bank.
Cold Wallet: This is a physical device like a thumb drive. This is quite safe since there is little connection to the Internet. Then again, a cold wallet can make it more difficult for conducting transactions. Some of the common ones include CoolWallet Pro, Safepal S1, and Trezor Model T. The prices range from $50 to $150 or so.
Altcoins
In 2011, a variation of Bitcoin hit the markets. It was called Namecoin. It became part of a category of cryptocurrencies called altcoins. Basically, this meant something that was not Bitcoin.
The open-source platform allowed for altcoins. For the most part, they were ways to add new capabilities and innovations. In the case of Namecoin, it allowed for merged mining. This meant that a miner could mine more than one blockchain at the same time.
Over the years, there have been many new altcoins created. There are currently over 17,000.6
Yet Bitcoin remains the dominant cryptocurrency and ether as No. 2. They account for a majority of the world’s transactions.
Stablecoins: This is an altcoin whose value is connected to another asset. This may be a fiat currency, gold or anything else of value. The goal of a stablecoin is to provide stability. Essentially, it can perform the function of a traditional currency. A popular stablecoin is Tether and its value is tied to the US dollar. It was actually the first one created. However, in May 2022, various stablecoins plunged in value.7 It was essentially a “run on the bank.” Some of the stablecoins dropped more than 90% in a few days.
Governance Token: This is an altcoin that provides a mechanism for voting on a blockchain project. This type of token is what is often used for DeFi (Decentralized Finance) and gaming systems. Some of the issues you can vote on include charging and setting fees, making changes to the interface of a network, or transferring funds to members. Also, there is no mining of governance tokens. They are distributed based on those who invest in the project. It’s similar to being a shareholder in a company.
Memecoins: These are altcoins that are more about fun and entertainment. Interestingly, some of them started as mere jokes. Regardless, memecoins can potentially have lots of value. But it can be tough to sustain this. Let’s face it, there is usually something else new to take its place. Memecoins are more about fads.
Utility Tokens: These are altcoins often used for online services. They are also common for Web3 applications. The most popular of the utility tokens is Ether, which has a “gas fee.” This is for the cost of data processing. Another widely used utility token is Filecoin. With this, you can buy storage on the blockchain.
Security Tokens: These allow you to acquire interests like real estate or artwork. The ownership can also be fractional.
Whenever there is a change in the blockchain protocol – such as with the creation of new rules or altcoins – there is a fork. This means there is a split in the network. And the new blockchain will have its own ledger.
Soft Fork: This is essentially an upgrade to the existing blockchain, and the network’s users must approve it. There also needs to be backwards compatibility with the existing forks.
Hard fork: This is where there is a clear split and there is no longer backwards compatibility. This is when there will often be the creation of a new cryptocurrency.
The Value of Cryptocurrency
Cryptocurrencies can definitely be risky. For Bitcoin, it’s not uncommon for there to be jumps or drops of 20%.
Then how do you value a cryptocurrency? There are no clear-cut rules. It’s not like a traditional asset like a stock. With this, the valuation is generally based on the profits of the company and the growth prospects.
Hedge: Some people invest in cryptocurrencies just to have some exposure to the asset. It’s a way to get diversification but also to not miss out on potential returns.
Scarcity: Many cryptocurrencies have limits on how many coins can be issued. This can make the digital asset scarce. So when demand rises, there can be significant increases in the price.
Influencers: As we’ve seen earlier in this chapter, people like Elon Musk can have a huge impact on the prices of cryptocurrencies – and this could be a matter of a single tweet.
Adoption: Traditional financial services companies like banks have been investing in cryptocurrencies and blockchain. This provides validation and demand.
Hacks: From time to time, there are high-profile ones. The result is that there can be disruption in the crypto markets.
Regulations: Governments tend to be slow with new restrictions. But whenever there are actions, there can be notable impacts on the valuations.
Immature Market: Cryptocurrencies are still in the early stages. Unlike stocks or bonds, there is not a long history of performance during periods of war, inflation, recessions, depressions, and so on.
Ethereum
Ethereum has several use cases. One is for allowing transactions of a cryptocurrency. The coin is referred to as ETH or ether. In early 2022, the price was about $3,400 and the total value of the market was $412 billion.
Another important use case – especially for Web3 – is that Ethereum allows you to create smart contracts. Essentially, this means you can create programs on the blockchain.
For the crypto world, this was revolutionary. Ethereum was not just about creating a new cryptocurrency. You could create any type of application. This could be for financial services, legal services or even a cool game. It’s only a matter of your imagination.
A key to smart contracts is the triggering of events based on certain conditions that are a part of an agreement between users. This is about traditional programming structures of If/then else statements. For example, an Ethereum smart contract may release funds if a party performs a service.
Now this can get complicated, such as in terms of the workflows. You want to game out the scenarios with the applications. If not, there could be actions taken that may result in a financial loss or a bad customer experience. There should also be a system of rules for resolving disputes.
To make an Ethereum transaction, you need to setup an account and there are two types. First, there are Externally Owned Accounts (EOA). This is where you have control with a private key and there is no code with it. You can send ether or messages from this account.
Next, there is the Contract account, which has its own code that is triggered when there is a transaction from an EOA. This type of account cannot initiate transactions. They can only come when there is a transaction from an EOA.
But there are usually few credentials you need to provide to open either account. You then spend Ether for a transaction. One of the reasons for this is to prohibit users – or even hackers – from bombarding the network with needless transactions. Next, the ether is a way to reward miners for validating transactions and providing compute resources to the network.
As mentioned earlier, the fee for using the Ethereum network is based on a unit called gas. And yes, you pay this with Ether, and they have dominations called gwei. Consider that there is 1 Ether for 1,000,000,000 gwei.
Like a typical blockchain, a smart contract makes it possible for users to transact with each other without the need for a trusted intermediary. The system is decentralized. There is also a copy of the ledger for everyone to see.
Agility: When you execute a contract, it is done instantly. There is nothing to fill out. There is also no need to reconcile errors.
Security: This is at a high level because of the use of encryption.
Backup: All smart contracts are stored many times on the blockchain. This means you will not have data loss.
Maturity: As the first system for smart contracts, there is the advantage of a refined set of features. There is also a large number of developers. This means that – if you have a question – you probably will get an answer from the community.
Standard: Ethereum has become the most common blockchain for DeFi and NFTs. This means that a large amount of value is locked in the blockchain. “The main pro for Ethereum is its enormous adoption and wide audience of users,” said Alex Melikhov, who is the CEO and founder of Equilibrium. “If you deploy your application on Ethereum, you have potential access to a large-scale audience of users who are already familiar with blockchain technology and its infrastructure. They will not struggle with basic things like setting up a wallet or sending transactions but will be able to start using your application right away.”
Each smart contract is stored on an address of the blockchain. This is contract address. Note that the developer does not come up with this. Instead, the contract address is based on a complex hash function calculation.
In terms of the development of smart contracts, you can use a variety of languages. Some of the common ones include Solidity and Vyper.
You will then need to compile the programs using the Ethereum Virtual Machine (EVM). This translates the code into bytecode and then is put on the blockchain.
Now this is different than a typical development environment – and the reason is the blockchain. For example, when a smart contract is executed, all the nodes on the network carry it out too. This is done with the EVM. This is all part of the process of verifying and accepting the smart contract.
The smart contract transaction will have a gas limit. If the processing results in a higher amount, then the transaction will not be completed on the network. But the sender of the of Ether for the smart contract will be reimbursed.
Scalability: This has proven to be perhaps the biggest problem. “The transactions are not scalable, and its users also have to pay high transaction fees per transaction,” said Pratik Gandhi, who is the Head of Marketing at Covalent.
Immutable: Once you create a contract, it is nearly impossible to change.
Third Parties: They are not completely out-of-the-loop with Ethereum. For example, if you are creating a smart contract, you may need the help of an attorney to create the terms as well as to enforce them.
Terms: The conditions in a smart contract can be ambiguous and complex. This can make it difficult to code on the Ethereum blockchain.
To deal with these problems, there has been work on Ethereum 2.0 (it is also referred to as Serenity). The goals are to increase the speed, scalability, and security of the blockchain.
For example, it will use the proof-of-stake (PoS) mechanism, which reduces the need for compute power to verify blocks. This is done where users provide cryptocurrency as collateral for the possibility of validating blocks. This is known as staking. For the most part, it’s a way to gauge the commitment or “skin in the game.”
The validators are randomly selected to mine the blocks. It’s not about many computers competing to solve math problems. Rather, when a minimum number of validators verify the block – at 16,384 – it is then added to the blockchain. This should help improve the security of the network.
The blockchain will also have a different structure. It will use shards. Essentially, there will not be a single chain but chains that are created and managed in parallel.
With this new approach to verification and blockchain structure, Ethereum 2.0 will have more scale. The network capability will go from 30 transactions per second to up to 100,000.
But in the meantime, there are various other projects with the aim to improve Ethereum. Examples include Polygon, Arbitrum, Starkware, and ZK-Sync.
Then there have emerged alternative networks, like Solana, Near Protocol, Avalanche, and Ronin chains.
Solana
Solana is perhaps the biggest competitor for Ethereum. With it, you can create non-fungible tokens (NFTs) and decentralized applications (dApps).
Back in 2017, Anatoly Yakovenko and Raj Gokal created the Solana project. One of the biggest priorities was speed. Note that Solana can get to 65,000 transactions per second. The fee structure is also fairly low – especially when compared to Ethereum.
For the minting, Solana uses the PoS protocol. But it also has its own system called proof-of-history (PoH). With this, it’s possible to verify if the transactions are in the right sequence. This is done by dividing the blockchain into different time periods and the validators are selected ahead of time (this is based on the PoS staking). For the most part, this allows for more agility and efficiency.
While this approach has seen good results, there are some nagging issues. With fewer validators, there is the concern that there is more centralization. For example, a large amount of the SOL tokens – which are the native ones for Solana – are owned by venture capitalists.
In early 2022, the price of the SOL was $116, and the total market value was $37.8 billion.8
Near Protocol
The Near Protocol may not necessarily be a catchy name. But this blockchain platform has been getting lots of traction.
In 2018, former Microsoft employee, Alexander Skidanov, and Ilya Polosukhin, launched the Near Protocol project. Over the years, the team has attracted some of the most renowned programmers in the world. For example, two have won the Programming World Championship twice.
For Skidanov, he is a fervent believer in decentralization and the power for the community. As a result, Near Protocol is focused essentially on the needs for developers. But there are features that make it user friendly. Consider that instead of using hash addresses, there are understandable written ones.
The Near Protocol system provides for smart contracts and dApps. It also operates with a PoS blockchain and uses sharding. This breaks up the network into manageable segments and the result is more scale.
As for the selection of validators, this is done by using an auction. The selections are for about every 12 hours or so.
Another key to the success of the Near Protocol is its powerful cloud infrastructure. It is based on serverless approaches and leverages a large number of systems across the globe.
For early 2022, the price of the NEAR token was $15.90, and the market capitalization was $10.5 billion.9
Avalanche
On the Avalanche website, it says that its blockchain system is “blazingly fast, low-cost and eco-friendly.” And this is not necessarily hype. For example, the transactional finality is under two seconds. By contrast, it is six minutes with Ethereum.
Avalanche is relatively new, with the launch in late 2020. The founders include two computer science professors, Emin Gün Sirer and Kevin Sekniqi, as well as Maofan “Ted” Yin, who is the creator of Facebook’s digital currency project Libra (although, the social media giant would abandon it).
By far, DeFi is the main area where Avalanche has seen the most success. Then again, financial platforms need high speed and scale. Although, Avalanche has been investing more in the Metaverse, gaming, and virtual worlds.
As for the blockchain, Avalanche has a blend of different approaches – which it refers to as the Avalanche Consensus Protocol. This includes the classical protocols. These are extremely fast and environmentally friendly. Then there are the Nakamoto protocols. Yes, this is the traditional system that Satoshi Nakamoto developed for Bitcoin.
Avalanche’s UI is similar to Ethereum’s and runs on the EVM. You can also use existing Ethereum wall addresses. As for the dApps, they are compatible with the Solidity language.
In early 2022, the native token for Avalanche – which is AVAX – had a price of $84 and a market capitalization of $22.5.10
ConsenSys
Joseph Lubin has a diverse background. After graduating with a degree in Electrical Engineering and Computer Science from Princeton University, he worked at a lab for the development of autonomous music and robots. After this, he worked for a cryptographic payments business and then went on to create his own hedge fund. He would eventually become a VP of Technology in Private Wealth Management at Goldman Sachs.11
But there were key themes in his career – and they revolved around cryptography, engineering, and finance.
In 2014, he met up with Vitalik Buterin in Toronto. He was intrigued with his ideas and helped Buterin create Ethereum.
For Lubin, he saw a big opportunity to build a company, ConsenSys, on this emerging blockchain. The timing was definitely spot on. The result is that ConsenSys has become a go-to company for Ethereum.
The company has created the MetaMask wallet, which has grown to over 30 million Monthly Active Users (MUAs).12 It has a strong presence in the USA, Philippines, Brazil, Germany, and Nigeria.
Next, ConsenSys has Infura. This is a leading development platform for Ethereum. There are about 430,000 developers on it and the on-chain ETH volume is over $1 trillion.
Codefi: This includes nine tools to help businesses digitize assets.
Diligence: This is a system for audits and security for smart contracts.
Quorum: This is for testing networks.
ConsenSys has a long list of customers, which include some of the world’s largest enterprises and governments. For example, the company helped the Asian Development Bank (ADB) create a DeFI system.13 The focus is on connecting all the central banks and securities depositories among 13 countries in Asia and the Pacific region. The goal is to reduce the time to settle cross-border transactions from a few days to near real time.
In March 2022, ConsenSys raised $450 million in a Series D Financing at a valuation of more than $7 billion.14 It came just after a few months from its other financing, which was for $200 million.
Lido
Staking Has Lower Risks: While this can be reassuring, it does mean that the returns tend to be lower. Users often would rather use their tokens for more lucrative purposes.
Locked Up: Staking means you cannot access your tokens. Again, this means tying up your assets, which weighs on returns.
Expense: Currently, staking is not cheap. You need to put up a minimum of 32 ETH, which is over $90,000. Because of this, crypto exchanges have created systems to pool assets.
Then what to do? A startup, called Lido, has been building systems to help out. The company is a top provider of liquid staking services. As a testament to its success, the company has raised over $73 million.
Lido has more than 80% of the market, with more than $10 billion in staked assets.15 There are about 76,000 crypto wallets.
With Lido, you can stake your assets without a minimum investment requirement. The company did this by creating a decentralized autonomous organization (DAO), which has allowed wider participation through more incentives. This has also helped to boost trust with the community. When Andreessen Horowitz invested in Lido, it purchased governance tokens for the DAO.
You can also use them for collateral for DeFi applications, which can mean generating better returns. This is done by the creation of a sophisticated derivative financial instrument. Lido currently is available for Solano, Terra, Kusama, and Polygon.
According to a blog from Andreessen Horowitz: “Lido democratizes staking. The Lido community’s unwavering commitment to decentralization really stood out to us. They recognize that for their approach to succeed, they will need to create a fully trustless staking pool while also embracing alternative solutions.”16
Private Blockchain
Blockchain’s public ledger is a critical part of providing trust and security with the network. But this feature has its drawbacks. Simply put, there are certain organizations – such as highly regulated ones like banks and healthcare operations – that need very strong levels of privacy.
This is where the private or permissioned blockchain comes in. There is a central authority that has certain requirements for entry.
Yes, the ledger is secure and to get access to it, a user needs to obtain permission from the central authority. The users can then operate the blockchain as they would if it were public. Think of this as partial decentralization.
Performance: Because of the smaller sizes of private blockchains, the speed is usually higher. This can be particularly important for enterprise applications that may need near real-time performance.
Efficiency: The rules for becoming members of a private blockchain means that users are more focused on the use cases of the network. This will mean less congestion and fewer transactions.
The Linux Foundation has created a project to help develop private blockchains. It is called Hyperledger Fabric (note that there are other systems available like Corda, Ripple, and Quorum).
The system is highly customizable. You can mix other technologies within the private blockchain. You can also use it on-premises, the cloud, and hybrid environments. Then there are capabilities to integrate with legacy IT systems. In other words, the Hyperledger Fabric has been built for enterprises. Note that half the companies on the Forbes Blockchain 50 use the technology. These companies have revenues or valuations over $1 billion.17
IBM Digital Health Pass: This is a private blockchain to manage and verify COVID-19 and other vaccination status. The system provides minimal personal data to the user.
Avaneer Network: This is a partnership of Aetna, Anthem, Cigna, Cleveland Clinic, HCSC, IBM, The PNC Financial Services Group, Inc., and Sentara Healthcare. They built a private blockchain to allow for better collaboration with healthcare services while having a lower need for administrative help. This system helps to manage 80 million patient lives and 14 million annual visits.
KrypC Pharmaceutical Delivery Supply Chain Solution: This is a private blockchain that streamlines the communications between pharmaceutical companies and insurance carriers. The goal is to allow for the safe delivery of drugs and treatments. A key with the private blockchain is the use of a stringent audit trail.
Iron Fish
Elena Nadolinski has a strong background as a software engineer. She has developed applications for companies like Airbnb and Microsoft with C# and C++. For example, she developed the autocomplete search service for Airbnb.19
In early 2017, Nadolinski founded Iron Fish. At the time, she got very interested in crypto and thought there was an opportunity to develop technology for privacy. In all, she has raised about $33 million for her startup.
While there have been ways to provide for privacy with blockchain, they have usually been complex. The result is that this has created friction for consumer adoption.
For Nadolinski, she based her system on zero-knowledge proof (ZKP). Essentially, this is where a user – called the prover – can verify the information for another user – the verifier – without there being any more information disclosed. Interestingly enough, this protocol is not new. Back in the 1980s, MIT researchers Silvio Micali, Shafi Goldwasser, and Charles Rackoff created the theoretical basis for ZKP. The result is that you can make a transaction that has the privacy of using cash.
Regardless, achieving privacy is no easy feat. After all, blockchain is inherently transparent. This means there is the risk of tracing.
For Iron Fish, the mission is to be a complete privacy solution – not just for a particular blockchain.20
Nadolinski came up with the name for her startup – Iron Fish – from reading about World War II. At the time, the US Najajo Code Talkers used this as the codename for a submarine.
Conclusion
At the heart of Web3 is the blockchain. In this chapter, we’ve taken a look at how this technology allows for decentralized peer-to-peer transactions. There is also a public ledger that provides a history of all the transactions, which cannot be changed. To create new blocks, the nodes on the network will mine them. This often means solving complex math problems.
The first real use case of blockchain was Bitcoin. This cryptocurrency has become dominant in the industry. But there have been the emergence of thousands other altcoins.
There has also been the development of an ecosystem to handle the cryptocurrency transactions. For example, there are exchanges as well as many wallets.
A major inflection point with blockchain – and Web3 – was Ethereum. This allowed for the creation of smart contracts. They have been revolutionary and have led to new businesses, such as NFTs and DeFi.
But Ethereum suffers from some problems, such as with high fees and difficulties with scaling. Because of all this, there are alternative platforms. Yet Ethereum remains that main one for Web3.
In the next chapter, we’ll take a look at the Web3 tech stack.