The blockchain is well known for enabling digital currencies. Although cryptocurrencies like Bitcoin have the lion’s share of media attention, there is another revolutionary possibility inherent in blockchain technology: secure, decentralized data processing.Don’t let the dull wording dent your enthusiasm. Newer blockchain systems propose to create a global, distributed Turing machine upon which a whole new layer of interaction and processing could take place on the internet, essentially wresting control of data away from centralized authorities and giving it back to users.That is the hope and promise. But how do these ambitious projects propose to pull it off?While blockchain and Bitcoin have their urtext in the Satoshi Nakamoto whitepaper, the idea of building higher-order systems atop a blockchain is arguably most clearly set forth in the Ethereum whitepaper. (This whitepaper remains essential reading, despite the preamble noting it is now several years old.) And while Ethereum (and its attendant coin, Ether) may be the most prominent higher-order crypto system, the category also includes Polkadot (a multi-chain system), Cosmos, Algorand, and others.It’s important to realize that because Ethereum is essentially a compute ecosystem, a wide range of other systems are built on top of it, including coins like Hex and Tether and systems like Uniswap and Amp. Ethereum also appears in a recently filed patent granted to Microsoft.I’ll refer to the fundamental idea encapsulated by Ethereum and other higher-order crypto systems as a “compute blockchain.” Compute blockchainsThe first step to understanding what we mean by a “compute blockchain” is to understand the blockchain itself. In particular, observe that the blockchain is run on a network of collaborating nodes, or peers. These nodes are run across the globe by individuals and organizations. The nodes in the network collaborate to confirm transaction validity, for a fee (as well as mining for new coins). If these nodes also run computational work collaboratively (also for a fee), the network is bootstrapped into a kind of decentralized state machine.A conventional blockchain transaction is allowed to perform only a limited number of actions, related to incrementing and decrementing amounts, to support a digital currency. Once the new state is validated locally, it is propagated into the network to be accepted as the global truth going forward. In the case of Ethereum, chunks of code called “contracts” or “smart contracts” (also called dapps, or distributed applications) are able to be installed into nodes. These contracts or dapps run more sophisticated logic. They can even call out to other nodes, which can in turn create recursive call chains. Each contract specifies how much “gas” (specified in the Ethereum Ether token) is required to execute steps in the logic, and callers of the contract supply a certain amount of Ether gas to run the contract. Clear rules dictate how the gas is consumed and what constitutes a successful change to the state of the machine. With this setup, the blockchain nodes represent both the processors and the consensus peers that store the persistent global state.As with other virtual machines, the purpose here is to create a layer of abstraction between the underlying system and the running application code. A blockchain machine like Ethereum creates a strictly limited container for running code, without access to the network or file system. Instead, the protocol defines APIs for contracts that allow for the alteration of the shared state of the machine, essentially making the blockchain consensus state the persistent memory. Put another way, the blockchain itself is the database.Blockchain programmingSeveral higher-order languages have been developed for Ethereum, which supports only a simple stack-based language out of the box. The current standard language is called Solidity, which supports a C-like syntax. Solidity code is compiled down to bytecode to be run as a smart contract. Ethereum provides an online IDE that you can use to develop Solidity apps: Ethereum Remix. A simple example of a contract that allows for incrementing and decrementing a counter is shown in Listing 1 (from Solidity by Example).Listing 1. Solidity counter// SPDX-License-Identifier: MITpragma solidity ^0.8.3;contract Counter {uint public count;// Function to get the current countfunction get() public view returns (uint) {return count;} // Function to increment count by 1function inc() public {count += 1;} // Function to decrement count by 1function dec() public {count -= 1;}}When nodes accept and execute contracts, they receive a fee for running the code. This is similar to the fee that Bitcoin nodes receive for validating blockchain transactions. There are a variety of ways for a developer to monetize dapps. An interesting result of the system described is that every node runs every contract. This is because the global state depends on a trend toward agreement on all state transitions, meaning every node must eventually validate and conform to the transactions in every contract. For more details on the Solidity language, see this overview.Proof of stakeEthereum is actively working on a new version, Eth2. Among the most significant developments is introducing a proof of stake (PoS) model, versus the proof of work (PoW) model used by Bitcoin and Eth1. These are known as consensus algorithms and they refer to how the blockchain enables nodes to prove they are valid operators. In Bitcoin and PoW systems, the nodes do difficult crypto computations, thereby demonstrating they have done the computational work. In PoS, nodes put up tokens they hold as a kind of running collateral.The most fundamental benefit to PoS is that a great deal of energy is saved by eliminating the need for nodes to perform expensive calculations to verify transactions. This is a huge energy savings in the form of electricity. This in turn lowers the barrier of entry for nodes, meaning more nodes (and people) participating. The result should be vastly improved scalability.The PoS model also allows for a kind of dividend payment for holding coins that you put up for proof of stake. Among the drawbacks to PoS is the simple fact that it is far less tested than PoW. We’ll be watching as the adoption of Eth2 and other PoS coins (like Tezos) expand. It seems a safe bet that some form of PoS (including hybrid models using both PoS and PoW consensus mechanisms) will be part of the crypto universe going forward.Ethereum is far from the only PoS crypto system to emerge. There are many proof-of-stake systems, both pure PoS and hybrid models.Sharding blockchainsIn an effort to improve scalability and adoption, some blockchains like Eth2 propose to use sharding. This is analogous to database sharding, and in addition to simplified payment verification (SPV) and light nodes, ranks among the clever approaches to limit how much data a node needs to hold in order to participant in the network.The basic idea behind sharding is to split a single blockchain into several cooperating ones. The nodes (even full nodes) then need deal only with the data and throughput for the sub-chain to which they belong, while a meta-protocol handles negotiating between the subchains. This is referred to as “Layer 2” technology. There are existing Layer 2 features in Eth1 including the ability to roll up bundles of transactions offline, then submit them with cryptographic proof to the main network.Investing and crypto exchangesAlthough blockchain is inherently decentralized, considering all of the data and work being done on independent nodes, we should take note of the burgeoning field of centralized crypto exchanges. Companies like Coinbase and Binance are at the forefront of this, but the field is full of hopeful contenders.These exchanges serve as a kind of middleware, offering add-on financial services (like interest for holding tokens and the ability to trade futures and on margin) by creating a public exchange for crypto tokens. These companies store blockchain info in remote wallets, but always maintain the ability to move crypto back to users’ private wallets.In addition to crypto services, various conversions to fiat currency (like USD) are available. This combined with the increasing sophistication of the financial instruments has drawn the attention of government officials who regulate traditional markets (of course, the IRS has something to say about such profits as well).Predicting technology trends is a difficult proposition under any circumstances. In the case of a radically new technology like blockchain, the difficulty of prediction drifts toward impossibility. A few more years will be required to shake out exactly how blockchain will evolve beyond its use for currencies. That being said, the trends identified here are certain to be a part of the story, and will be important factors to understand and watch.
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