Learn about proof-of-stake consensus algorithms, smart contract functionalities and decentralized applications (a.k.a. DApps) in part two of our primer on Ethereum and the beautiful world of Altcoins! Make sure to read part one as well and learn about the revolutionary power of blockchain and cryptocurrencies!
Blockchain platforms have a come a long way since the inception of Bitcoin in 2009. Blockchains of the second generation like Ethereum and Tron have introduced novel consensus algorithms like proof of stake (POS). Proof of stake will make the consensus mechanism completely virtual as opposed to the mining involved in proof-of-work systems. While the overall process remains the same as proof of work (POW), the method of reaching the end goal is entirely different. In POW, the miners solve cryptographically hard puzzles by using their computational resources. In POS, instead of miners, there are validators. The validators lock up some of their Ether as a stake in the ecosystem. Following the lock up, the validators bet on the blocks that they feel will be added next to the chain (and hence are valid). When the block gets added, the validators get a block reward in proportion to their stake.
But novel consensus mechanisms were not the only novelty introduced by second generation blockchains. They also introduced novel network functionalities, such as smart contracts. A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. In other words, a smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into a few lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network and can hence not be manipulated and are immutable. The code controls the execution, and transactions are trackable and irreversible.
A few examples of blockchains with smart contract functionalities include Ethereum, Tron, Cardano, Tezos and EOS. The last two are also referred to as third generation blockchains because of technological innovation such as delegated proof of stake consensus algorithms, which allow for improved transaction speed and network scalability.
While Bitcoin paved the way for cryptocurrencies and the blockchain technology, Ethereum was the one that first showed everyone the true potential of blockchain technology. In Ethereum’s white paper, it was stated that the intention of Ethereum is to create an alternative protocol for building decentralized applications with emphasis on development time, security, and scaling. You may think of Ethereum as, for the lack of a better analogy, the Mother of DApps. Armed with its very own programming language, Solidity, Ethereum enables developers to form the before mentioned smart contacts using the Ethereum Virtual Machine (EVM). With these tools available, developers made dApps that have real-life use cases, ranging from asset management to resource planning and increasingly decentralized finance (DeFi) applications.
Decentralized applications (DApps) are digital applications or programs that exist and run on a blockchain or P2P network of computers instead of a single computer and are outside the purview and control of a single authority. DApps can run on both a P2P network as well as a blockchain network. For example, BitTorrent, Tor, and Popcorn Time are examples of applications that run on various computers that are part of a P2P network where there are multiple participants on all sides‘ some are consuming the content, some are feeding or seeding the content, while others are simultaneously performing both functions. There are many prominent blockchain-based DApps out there already. Some examples include the DeFi protocols Compound and Maker as well as BAT, Augur or Synthetix.