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There is one thing the crypto space needs to focus on to succeed

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Many things have passed since Satoshi Nakamoto launched the Bitcoin blockchain in 2009, the first peer-to-peer decentralized network. Satoshi, whose identity is, to this day, unknown, revolutionized the world with the first functional system to send actual digital assets to anyone, anywhere in the world. Many things have been said or stated since then about blockchain: “the future of finance”, “cryptocurrencies are programmable money”, “first non-manipulated currency system”, or “the destroyer of central banks”. However, all these could be senseless if necessary advancements aren’t put into place. Despite this, many people are unaware of those limitations but still invest a decent amount of their net worth in crypto, while few of them truly understand even the most basic concepts of the technology.

Blockchain‘s true value

Blockchain’s real value derives from one true benefit, its inherent security. Blockchains are extremely secure when it comes to on-chain data. The vast majority of security breaches we commonly see in the news aren’t due to the blockchain being hacked, but for two main reasons: people being fooled to hand in their wallet’s private key to a hacker — a phishing attack, for instance — or hackers exploiting smart contract bugs to attack DeFi protocols, like the recent Crema Finance $6 million exploit. Thus, why are blockchains so secure? Blockchains are so secure because they have what I call four-layer security:

  • For the first layer, all data stored in a blockchain is encrypted and hashed. On the one hand, data encryption makes it really hard to obtain the actual data unless you possess the private key. On the other hand, hashes are mathematically irreversible functions that generate ‘gibberish’ from a set of data. Also, a hash is unique to the data contained in that block. If the data inside is modified, the hash changes, therefore making it really easy to detect if a block has been modified. Consequently, encryption increases the security of your data, and hashing serves as a tamper-proof mechanism, because the moment original data is modified, the hash will change and the change will be easily detected.
  • The concept of a hash is pretty hard to grasp, I know. Think about this as the egg and the omelet. You can obtain a unique omelet (no two omelets in the world are the same) from two eggs, but you can’t obtain two eggs from an omelet, because it’s an irreversible process. Hashes are kind of the same thing but in the world of math functions.

  • As for the second layer, each block of the blockchain contains the hash of the previous block (which is where the concept of blockchain comes from). The reason for this is that the moment a hacker tampers a block, the hash of the block changes — as mentioned before . As the hash changes, all the following blocks are now invalid because the hash of the tampered block no longer coincides with the hash the next block has stored. Consequently, the hacker not only needs to modify one block, but also all the following ones — we are talking about thousands of blocks, 743.000 at the time of writing in the case of Bitcoin. I don’t think I have to explain how hard that would be to do.
  • Additionally, the third layer is what we call the sybil control mechanism. This mechanism, Proof-of-Work in the case of Bitcoin and Proof-of-Stake in the case of blockchains like Avalanche, defines the rules of participation in a blockchain. In the former case, miners have to solve very complex mathematical problems to have the opportunity to mine the next block. Therefore, a hacker needs to carry out that proof-of-work to tamper with the block, and also do the proof-of-work of the following blocks. This slows the overall process considerably, which prevents supercomputers with enormous hash rates from using their computing power to guess the hashes of the tampered block and the following ones in a short amount of time. With regards to the latter, validators — the equivalent of a miner in a proof-of-work blockchain — stake their coins to participate in the chain, with the risk of losing them if they misbehave. Consequently, in both cases the sybil control mechanism not only defines how to participate in the blockchain, but it also disincentivizes bad behavior, which adds an extra layer of security.
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    An important concept with regards to control mechanisms: There is a common misconception regarding control mechanisms. One thing is the sybil control mechanism discussed in the paragraph above, and the other is the consensus mechanism. In other words, PoW and PoS are not the mechanisms blockchains use to achieve consensus. For instance, in the case of bitcoin, the “consensus mechanism” is the Nakamoto consensus, a “consensus mechanism” that solved the Byzantine Generals Problem (a game theory problem that describes the issues decentralized systems face to reach consensus without any central authority). On the other hand, he/she used Proof-of-Work, the “sybil control mechanism” adapted by Hal Finney, to deter frivolous or malicious uses of computing power —Hal is also curiously the first recipient of a bitcoin transaction, the reason why many have suspected that he was the actual Satoshi .

    Bottom line, the sybil control mechanism defines how to participate in the blockchain, the consensus mechanism allows distributed networks like blockchains to achieve consensus with no central authority.

  • Finally, the last security layer and, probably, the most important one, is decentralization. There is a reason decentralization is fundamental, and it certainly isn’t the stereotypical pirate story of ‘fighting against centralized entities like central banks or governments’; decentralization is key because truly decentralized networks are almost impossible to hack, period. If a node tampers a block for malicious reasons, unless the hacker owns more than 51% of the nodes of a blockchain, his/her proposed tampered blockchain will be rejected by the rest of the nodes in the network. Therefore, the hacker not only needs to tamper with a block and all the following ones, which is a considerable feat by itself, but he/she also needs to control the simple majority of the nodes in the network. For context, bitcoin currently has more than 14,000 nodes, which means the hacker needs to control more than 7,000 of them. There is a reason why bitcoin has never been hacked. Good luck with that!
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    Bottom line, what makes blockchain so unique is that it’s a technology with the capacity to create decentralized networks that achieve consensus without central entities, and that are so hard to hack that it is the best technology to store data securely, whilst assuring traceability, immutability and, the most important thing of all, trustless proof-of-ownership. These concepts set the foundation for all of crypto’s applications (smart contracts, NFTs, SBTs, … you name it)

    The next frontier for crypto is scalability without centralization

    Now that the true value of blockchain is clear, we need to understand what the crypto industry is missing as of today, and that is scalability without centralization. The blockchain trilemma states you can’t have a blockchain that is scalable, decentralized, and secure — all three at the same time . To better understand this, let’s use Bitcoin as an example.

    Bitcoin is, by far and wide, the most decentralized blockchain. Hence, one could argue that it is also the most secure network (please refer to the fourth layer of security described earlier to see why), although this isn’t as crystal clear as the decentralization part, which is undeniable (for context, Bitcoin’s Nakamoto coefficient, a way to calculate blockchain decentralization, is more than 200 times greater than the next most decentralized blockchain, Avalanche). All this is great, but it comes at a big cost, as Bitcoin is, probably, the least scalable blockchain of them all. This is the trilemma issue in a nutshell; a tradeoff on which the vast majority of projects focus on two of the three elements and ‘forget’ about the third.

    Consequently, we now understand why Bitcoin can only manage seven transactions per second, and how Bitcoin can never become a viable digital currency, and why Bitcoin’s narrative is no longer “Bitcoin is digital money” but “Bitcoin is digital gold” (I am aware of Bitcoin’s lightning network, but it is fairly centralized, to say the least). Another example of a blockchain that doesn’t scale in its current state is Ethereum, which is quite decentralized (going to be a lot more decentralized in the future with Eth 2.0). However, in its actual state, I’m just going to say one thing, those gas fees tho. Onto the next paragraph.

    So what did the majority of other blockchains do? Simple, knowing they can’t compete with Bitcoin in its terrain, they went the other way. That is, compromising decentralization for benefit of creating scalable blockchains. A perfect example of this would be Solana, which is crazy scalable but also crazy centralized (which explains the numerous exploits and outages).

    The scalability issues created the need to deploy new types of blockchains, called L2s, that sit on top of the L1s (Ethereum, Solana, Avalanche, etc.) to help mitigate the bottlenecks these L1s have; these most times just resulted in an even greater degree of centralization.

    Other blockchains like the aforementioned Avalanche are actively trying to solve the trilemma, with what they describe as subnets. This very promising feature creates smaller blockchains inside the main one, with their own rules and tokenomics, validated by a subset of validators from the main chain. The results are very promising, but there isn’t sufficient evidence to argue that the trilemma is finally solved.

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    What if blockchains never scale?

    Scalability is both the holy grail and the Achilles’ heel of crypto. Proving that blockchains can scale would be the real moment of truth for the crypto space. As long as they don’t scale, not one central banker in the world will give crypto a second thought, as without scalability there is no DeFi, no NFTs, no nothing, as adoption is fueled by scalability. Without it, it’s like a Ferrari with an empty tank; amazing features, and ultimate speed, but pointless anyways.

    The question is, was blockchain ever meant to scale? Some people, like Jack Dorsey, founder of Twitter, don’t think a purely decentralized, secure, and ultra-scalable blockchain is possible, thus proposing the creation of Web 5.0, which defines a non-blockchain distributed network that leverages Bitcoin’s blockchain as an identity layer. That is, going back to the original concept of blockchain, a distributed ultra-secure network for data storage. In that scenario, the desired level of scalability is much smaller. On the other hand, in scenarios like Web 3.0, with things like DeFi, scalability is a must, and we as a space have yet to prove we can use blockchain at scale.

    However, we need to make sure that scalability is achieved without compromising decentralization. Decentralization is not only a key selling point of blockchain all by itself, it’s an inherent security feature of blockchains; I can’t seem to find scenarios where the world needs a centralized blockchain, it really doesn’t offer anything substantial to justify the effort of building the future of the internet and finance in it; we NEED truly decentralized and scalable blockchains to make this work, as people like Vitalik or Emin, founders of Ethereum and Avalanche respectively, have expressed explicitly or implicitly.

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    A final word

    This is not a post to shame crypto. I am personally invested in it, in blockchains like Bitcoin, Ethereum, Avalanche, and Cardano, so I do have considerable hope and interest towards the success of the space. Despite that, I do understand the risks of my investments, and by no means we are guaranteed to succeed. Please do your own research before investing in crypto, and always a quantity you are capable of losing.

    Although I use Medium as a way to express myself, I also consistently drop a newsletter every Sunday in which I try to simplify, in an objective and digested way, the main tech, crypto, and market news of the week, so that you can benefit from them and leverage that knowledge for your business. Feel free to subscribe:

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