Blockchain technology began with The Bitcoin Whitepaper in 2009, since then it has already changed the world. The technology has existed for little over a decade and yet it has found its way into every industry. Right now people apply it for finance, remittances, logistics networks, credit, quality control, etc. The technology already impacts every aspect of society and the economy. In the coming years its influence we'll only grow, and here we'll present some predictions for the future of Blockchain.
Blockchain technology as of today
To understand something about the future, first, we have to do a quick review of where we are. A good way to visualize the state of cryptocurrency is to track the dominance of Bitcoin in the market. BTC is the first cryptocurrency and Blockchain network, but use case is not its strength. Ethereum with the introduction of smart contracts and the Ethereum Virtual machine expanded blockchain adoption.
Since then, market dominance has been a battle between the limited but highly secured Bitcoin, and the versatile, powerful, but still awkward to use Ethereum. These two camps represent Blockchain at large, one is all about preserving value and ensuring scarcity. While the other is about expanding uses and boosting value through inflation.
Five years ago when Ethereum first entered the scene, most other crypto coins were just copying the model of Bitcoin and following its design. It is no surprise that BTC dominates 90% of the market, and the rest were just marginal projects.
Bitcoin market dominance measured by market cap
*Source: TradeView
As Ethereum grew, Bitcoin's dominance fell almost in lockstep with ETH's growth. The culmination of this trend was the ICO (Initial Coin Offering) Boom of the 2017 and 2018. Here the market share of the BTC fell to its lowest point, and Ethereum rose to its highest.
Then the ICO crash followed and BTC recovered, but it has never reached the same levels of dominance as before. Since then numerous other Blockchain protocols have emerged and the field is only getting more crowded. Right now, BTC's dominance is once again falling due to the Decentralized Finance (DeFi) trend which is shaping the crypto space.
Once again, this is happening mainly in the Ethereum Network. This has resulted in thousands of new projects in the past few months, but it has skyrocketed gas fees for the ETH network. It is unclear what is the future of DeFi under current market conditions.
For more information read How is DeFi Transforming B2C Financial Services? 10 Examples
For now, the two large models in Blockchain Bitcoin and Ethereum are defining the future of the technology. They are laying the ground of what is possible since any other project out there looking to grow has to do it by catching up to the big two. Many predict that Ethereum will be the winner since it has so many services on its network. But this is putting tremendous strain on the ETH infrastructure and if this results in a DeFi crash, similar to the ICO crash, faith in this model could shatter in the short to medium term.
What's in store for blockchain technology
*Source: medium.com
The 3rd generation projects will define much of the future of the blockchain technology. The term refers to those projects that are looking to advance the space beyond what Ethereum started. Many are the blockchains that call themselves 3rd generation, but few are bringing something new to the table. Some of the incoming innovations center around key technical issues such as:
Replacing blockchain as a data structure
The term 'blockchain' refers to the data structure used in a decentralized system. A blockchain has bundles of information called blocks, that link to each other by hashing the information of the previous block and including it in the next. Some argue that this design is slow and other types of data structures would better serve a decentralized system.
One example is IOTA, which uses a Directed Acyclic Graph (DAG). In a DAG there are no blocks, instead, each new transaction is an independent event which refers to two previous entries creating a unidirectional web of nodes. A DAG does not need mining and can be broken into shards far more quickly than a Blockchain.
Graph of a DAG
*Source: wnt.com
This design is far faster and cheaper to run than a blockchain. But it also has numerous security problems, and deploying smart contracts in a DAG is more challenging than in a blockchain. In any case, it is a very promising technology that is questioning the basic infrastructure of distributed systems.
Virtual Machine vs locally run smart contracts
One of the ambitions of Ethereum is to become a world computer. This is why they created the Ethereum Virtual Machine (EVM) . The EVM is responsible for executing the computer logic of the smart contracts deployed to Ethereum. These are written in a high-level language, such as solidity, and transformed into byte code when deployed to the main network.
From there the EVM is responsible for running the smart contract every time someone calls it from outside the Blockchain. The problem with this model is that it is very slow. The EVM runs one line of code at a time and the entire Etherum network stops until they the global state is updated. Each output of a smart contract has to be telegraphed to every active node in the network.
This slow process is being abandoned by new projects such as Cardano, Radix, and Ergo. In these blockchains, smart contracts run locally on the machine executing them and only the final output is broadcasted to the network. This is much faster, but it also means that smart contracts don't have the same security as they exist off-chain and subject to manipulation. The trade-off comes down to faster execution over smart contract security.
In the end, despite all of the hype, the 3rd generation blockchains remain an unproven technology. So far, only Bitcoin and Ethereum have a track record that can be studied. The future of Blockchain may lay in some of the technologies outlined here, but nothing is certain at this point. In the short term, the world of Blockchain is dominated only by the big two.
