Make sense of blockchains, cryptocurrency and web3
Blockchain as a concept has existed on the tech landscape for over a decade now. Along the way, a very large number of new words and concepts have emerged that are still associated with blockchains. Some of them are decentralization, cryptocurrency, bitcoin (of course!), smart contracts, NFTs, web3, ICO (initial coin offerings), decentralized finance, proof of work, proof of stake, dogecoin, ethereum, stable coin, decentralized exchange, block space, cryptography, permissionless.
Apart from this long and ever extending list of words, are the unsavoury references such as scams, obsession with prices, people loosing money, gambling and Ponzi schemes. There are criticisms too, such as influential experts denouncing cryptocurrencies entirely, some upholding blockchains but denouncing cryptocurrencies, so on and so forth. Some others say it is technically sound, but does not have any uses! There are misconceptions as well, such as that, blockchains are entirely about replacing fiat currencies, or that they are only about finance, etc.
What even is this tech? How do you make sense of it?
We deconstruct blockchains using simple language and then weave an imaginative story around what they are. Then we gradually dig deeper in great detail into all the different aspects of it, so that at the end, you are able to make sense of the entire space, the phenomenon that is in front of us. Also to understand why blockchains are exciting and hold great promise for the future of the internet and human civilization as a whole. We will steer fully clear of blockchain assets as an investment vehicle and price conversations, numba go up, wen moon, etc at all times.
Blockchains do not compare well to anything on the current internet (before blockchains). What they achieve for users is to bring real physical world properties to the internet.
The real world is full of objects- roads, trees, people, computers, animals, cars, copper, steel, rice, wheat, currency notes and coins, sticks, stones, guns, factories, so on and so forth. An exhaustive list of objects constitute reality. Over time, certain interactions happen between humans and the objects, among the objects, and according to some natural/ human rules and then we arrive at a new reality of objects (some objects have moved, some have transformed into different objects, etc). As time moves on we keep arriving at new states of reality of objects and agents (humans) as ‘things happen’ to objects based on certain rules or ‘algorithms’.
Let us call the current snapshot of reality the ‘state’ of reality. Then let us say some ‘things happen’ in a small unit of time and we arrive at a new ‘state’ of reality based on the previous reality and ‘things that happened’. This continues ad infinitum, as we keep adding unit times and ‘things happen’ing to arrive incrementally at new realities each time.
The blockchain acts similarly.
The blockchain in its entirety, all the blocks that have been added so far ( this is for simplicity), makes up the current state of the blockchain. Then we add a new block (a set of ‘things happen’ on top of previous state) to the blockchain. We commit it to the blockchain, and the new block in addition to all the previous blocks now represents the current state (or snapshot) of the blockchain.
For example, let us say I have an apple and you have none in the current ‘state’ of reality. In the next instant of time (a block), I give you an apple (transfer of 1 apple from me to you). In the new ‘state’ after the instant of time, I have no apples and you have one. For this example, transfer of 1 apple is the transaction that is carried in a block that gets added to the blockchain to reflect a new state of the blockchain.
The addition of the new block is done by agents/ parties who secure the blockchain. These are any person/ entity in the world who is willing to run the security algorithm. They get rewarded for running the algorithm successfully with the cryptocurrency asset of the blockchain called cryptocurrency (for bitcoin blockchain the cryptocurrency is Bitcoin, for ethereum blockchain it is Eth etc). The algorithm they run is called the consensus algorithm (for bitcoin blockchain the consensus algorithm is called proof-of-work)
Multiple parties have an incentive to modify or currupt the current state to benefit themselves. For example, I may want to currupt/ change the current state to show that I have 100 apples instead of 1. These efforts need to be repelled, and the agents/ parties who run the security algorithm do this for the blockchain, securing it from any attacks to change the state.
All that goes INSIDE a block (the assets/ objects and the ‘things happen’ instructions) constitutes web3 (NFTs, Decentralized Finance, Decentralized Autonomous Organizations). Web3 is both the assets and smart contracts on a blockchain. Smart contracts are the instructions that define how users (addresses) and different assets (objects) interact among themselves and each other on a blockchain
Tldr: A blockchain is a shared state (data) and execution environment secured by a consensus layer (agents that run consensus algorithm and get rewarded cryptocurrency of blockchain). Web3 is the assets and smart contracts on the blockchain
We now make a leap of imagination and build on the analogy created above to understand blockchains even better. With a 13 year history, we now know enough to identify blockchains as internet native digital civilizations.