2nd layer protocols to Blockchain, evolution and examples

Blockchain 1.0, 2.0, 3.0 – Evolution of Blockchain technology

This article sees to explore the evolution of Blockchain technology. How are we seeing real world adoption for each progression and what can we speculate might come about? This article is intended for people with some knowledge of blockchains. Thus features and terms won’t necessarily be described. This article is my views. I have done light research but mostly it’s coloured by my experience in my crypto journey.  

Some veterans to Blockchain would likely argue that phasing the development cycles creates more animosity than value but I argue categorizing overall trends is important. 

• Blockchain 1.0 - Distributed ledger 
• Blockchain 2.0 - Distributed state-machines 
• Blockchain 3.0 - 2nd level protocols 

Blockchain 1.0 - Distributed ledger

The Blockchain 1.0 is distributed ledger transactions. Some ledgers use value bearing high liquidity assets called crypto currencies. Others, utility tokens where the value bearing part is either removed or downplayed. The very first application of blockchain was crypto currency. The Internet of Value enabled through the visionary whitepaper outlining blockchain as a technology and proposing the first application, Bitcoin a peer-to-peer electronic cash system. 

An Alt-coin is a crypto currency that is not bitcoin. Many projects were launched using this new technological breakthrough. Some specialized the technology, adapting it to a need. Others tried taking on Bitcoin’s market position with improvements to the value proposition like better anonymity, faster transactions or value adding data layers. 

Bitcoin is not a static project. Bitcoin is continuously improved through ‘Bitcoin Improvement proposals’ (BIP). These proposals add functionality that enable other applications. Examples of those are coloured coins - attributing representation to a set of coins, conditional trading, bigger block-sizes and more. Not all proposals are accepted.  Because of this Bitcoin has several layers running on-top of it. Some with their own alt-coin synergistically helping provide the service. 

Real world adoption of Blockchain 1.0 include:  

• Banking intermediate layer through the Ripple and Stellar project. These are consortium type projects that uses a type of mining algorithms that by design are closed off to the public. They are entrustable rather than trustless intermediates. 
• Through the Bitcoin ATM 3rd party ecosystem, a global network of brokers, local buyers and sellers Bitcoin offers a real alternative to international money transfer brokers like Western Union. However in some regions the benefit is eaten up by the spread between bid and offer in the market. 
• Anonymous transactions using, TOR-network, coin-mixing, ring signatures and zero-knowledge proof algorithms. Blockchain technology is born out of the cryptographer community and is at its core an arms race against centralized authorities putting first anarcho, cyberpunk, individualism and libertarian creeds like individuals right to privacy, right to private property and right to freedom of speech above convenience when enforcing the will of the ruling class. These cryptocurrencies can also be used for payment layer in criminal transactions but the debate about the utility of the technology should be seen in a civil rights context. DNS projects like Namecoin, one of the first alt-coins can also be placed in this category. 
• Timestamping and registration on the blockchain, immutable proofing events. Blockchain’s can as above mentioned be anonymous, but most are not. They are very transparent. The transparency of blockchains can be used to make entries that are trustlessly immutable. An attribute that does very well with certifications after audit. First generation proof of existence. 

Crypto Currencies should be assessed by the following metrics: 

1. Generally Accepted - Many people must accept the money as a settlement of debt or as a discharge of obligation. 
2. Durable - Its quality/value does not deteriorate over time, which is why we do not tend to use food products as money. 
3. Divisible - If you divide the money in half, each half should be worth 50% of the whole. This is why we tend not to use diamonds or artwork as money. 
4. Stable/Consistent - The value does not fluctuate substantially with time. 
5. Transportable - It is easy to move from one place to another. 
6. Scarce - It is difficult to acquire. 
7. Easily recognizable - It needs to be obvious what it is, mostly for the purposes of #1. 
8. Difficult to Counterfeit - This mostly has to do with #6. 

In addition to these, there are a variety of disputed desirable characteristics of a good currency. 

1. Elasticity - It must be able to expand or contract as needed in the economy. Providing price stability. 
2. Economical - The cost to produce it must be less than its value. 
3. Inherently Valuable - The money should have a use besides its use as money that gives it intrinsic value. 
4. Long history of acceptance - A long history of acceptance benefits #1 and #7. 
5. Supervised - The currency is tracked by a central authority to avoid economic catastrophes. 

Blockchain 2.0 – Distributed state machines (Smart contracts) 

Blockchain 1.0 supports conditional transactions, but not Turing-complete programmable conditional transactions using the blockchain as a decentralized state-machine (smart-contracts). Nick Szabo one of the first developers of Bitcoin has proposed the need for smart contracts (non-blockchain) already back in 1997. With this proposal blockchain infrastructure would not only be a disrupter in banking and payment processors but also in law practice and accounting. The smart contract feature would be deserving of the title Blockchain 2.0 and was first introduced in Ethereum.  

Other projects before Ethereum had claimed or been given the title Blockchain 2.0. Notably Next (Nxt) that I would give the title blockchain 1.5 for its user issued assets and exchange of such. A refinement of coloured coins feature. Ethereum also support user issued assets and exchange of such. 

Ethereum was proposed in 2013 and launched in 2014 by Vitalik Buterin. Nick Szabo has not been involved in Ethereum development. 

Smart contracts Blockchain 2.0 has seen more adoption than Internet of Value Blockchain 1.0. Using distributed ledgers with state-machine functionality to create timestamps and conditional transactions has been implemented in several supply chain related proof of concepts with great success. So far Blockchain 2.0’s greatest success has been in use cases void of the whole Internet of Value aspect. 

For supply chain and Internet of things, value transactions could be very relevant but the infrastructure and legal framework is not in place yet. However using blockchain as a communication layer replacing paper and rubberstamps in supply chain and keeping track of million of transactions in Internet of things is proving to be a killer cost reducer with potential to value add. The cases has so far mostly been found in B2B consortium relations. With identified known participants these projects are more in the nature of trustworthy systems rather than trustless. These Blockchains that doesn’t rely on cryptocurrency for incentivise security against Byzantine Fault Tolerance problem like Proof-of-work but rather uses a variance of gossip about gossip algorithms. Examples are IOTA and Hyperledger Fabric.  

A major lack in Blockchain 2.0 is still the need for real anonymous smart contracts.  

Anonymity in Blockchain 1.0 is achieved by making the transactions near impossible to track. If the users take precautions cloaking their digital footprint with VPN then the Blockchain may offer sending the data transaction encrypted decoupling the link between sender and receiver as it is unknown who can unlock the encrypted message see Zero-Knowledge based projects like ZCash. The transaction will be mixed with other transactions, in some applications of blockchains mixed with dummy transactions.  

For Blockchain 2.0 the problem is calculating encrypted data without first decrypting it. If the conditions of a smart contract is known to the miners or nodes then it isn’t anonymous.  

Ethereum is trying to tackle this problem with an implementation of the strongest anon-algo Zero-knowledge proof. Hyperledger Fabric has permissioned blockchains where participants can be kept on a need to know basis. Microsoft is proposing a 2nd layer to blockchains that will add consortium and anonymity capabilities to blockchains that otherwise doesn’t have it together with other scaling features. 

We could see decentralized exchanges being used to help create mixing for smart contracts. 

Blockchain 3.0 – The 2nd layer protocols, scaling and interoperability of blockchains 

Satoshi Nakamoto the pseudonymous creator of Bitcoin laid the foundation for payment channels in bitcoin back in 20091. The idea is to have an open tab between two users that can later be settled. In the history of bitcoin 2017 will be remembered as the year bitcoin almost broke under its own weight, paralyzed to find a solution by a divided community and fear of centralization. Bitcoin forked with the core branch going the way of a 2nd layer protocol “The Lightning network” and the fork Bitcoin Cash going the way of bigger block size increasing the hard-disk space it requires to run a full node/wallet. 

The lightning network is payment channels distributed. A 2nd layer protocol to bitcoin that allows users to keep tabs open between each other’s routing payments through IOUs. A balance can be cashed out of the lightning network at any time and control of the balances remain decentralized. 

An important metric for Blockchain has been transactions per second. For Internet of Value type cryptocurrencies comparable performance to the Visa / Mastercard ecosystem has been the golden standard. The VISA network averages 1667 transactions per second but is capable of a theoretical 56,000 transactions per second. Bitcoin without lightning network supports 3-4 transactions per second. However, this number scales to theoretical millions of transactions per second with the Lightning network 2nd layer. Another benefit of using a 2nd layer protocol is instant transactions compared to bitcoins out of the box 10 minutes average processing time for well tipped transactions. Lightning network is also much cheaper in fees. 

A mist of the discussion of 2nd layer vs increased block size Microsoft released a white paper and a press release expressing their view on needs for 2nd layer protocols. Most of the community took it by headline as a support for lightning network and it might have been so by timing. The whitepaper described a 2nd layer to smart contract platforms like Ethereum. The 2nd layer promises to scale a chain like Ethereum to near database performance allowing up to 1600 transactions per second a massive increase from native 20-30. It also adds functionality known from popular consortium type smart contract distributed ledger technologies like Hyperledger Fabric. Specifically creating consortiums on-top of public blockchains with permissioned access, anonymity to smart contracts and trusted players. The Coco Framework (Confidential consortiums) as it is called batches transactions into public blockchains, encrypted. It utilizes Intel and Windows ability to create trusted enclaves on their architecture where code can be executed untampered. Because of this, once connection and membership is initially established data can be shared on a secure channel established on an unsecure channel like a public blockchain.  

Year 2018 is posed to be big for decentralized exchanges. Many are popping up trying to get a piece of the big market the centralized exchanges are sitting so heavily on. Some decentralized exchanges are more decentralized than others. The thing is that you can’t make a truly decentralized exchange without also creating a service router between blockchains as you need it to coordinate off-chain data transactions that orchestrate trades. 

I have been involved in the development of a 2nd layer protocol since 2014. The protocol is called Xbridge and is the core enabling the Blocknet platform on which the first application is the Blocknet DEX. Xbridge protocol makes blockchains interoperable. This enables blockchains to be service based rather than monolithic platforms. Blocknet platform aims to be a service router that connects blockchains both in data and value layer. Allowing a dApp (Decentralized application) to call in functions from several chains while not necessarily keep balance for each. Blockchains come in different sizes and with different attributes. Scaling blockchains will not be about creating super highways but rather redirect traffic to the optimal chain. Protocols like Xbridge and it’s closest competitor Supernet will help create the internet of blockchains one big integrated ecosystem. These two projects are the first but not the last and hopefully the future will bring that the interoperability protocols are also interoperable between each other. 

The reason Xbridge is a big deal is not the current main attraction of an exchange that is leading on decentralization both technological but also organizational and development. The main attraction is the service router. It will allow blockchains to specialize, rather than trying to cater to all needs it will instead be kept small and specialized. The blockchains will compete on price of transaction vs features like security.  

Companies ERP systems will be interconnected on blockchains, but a large-scale ERP system has several ledgers, a general ledgers and sub-ledgers. It also has various registers for master-data, financial and product. The ERP system talks with Product life-cycle, Product data management system and so on. An entire value stream from resource to consumption can benefit from having their ledgers being able to talk to each other. Supply chain planning as we know it will be completely disrupted. We could even see the fabric of how we organize businesses be reconstructed in a new image because of blockchain. The only thing that was missing for this was either the perfect blockchain or the service router that can utilize the best fitting features of an ecosystem of imperfect blockchains. 

Looking to the future I see a great need to expand the existing Enterprise Architecture frameworks to better encompass the changes that will be brought forward by blockchain tech. Especially a service based blockchain architecture and a disruption to how we know organizational forms now. I hope to later do a piece on the new organizational form DAO with real experience from Blocknet that as guiding strategic principle is trying to be as decentralized as possible. I will try to use existing EA modelling tools and touch how these can be used for DAO and what could be lacking. I will also try to touch consortium modelling.