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Blockchain 2.0 – Distributed state machines (Smart contracts)

Blockchain 2.0 is the second wave riding the hype of Ethereum and the potential of Smart contracts. The smart contract blockchains where the crypto currency aspect was downplayed enabled many companies to experiment with the potential for efficiency in cross company data integration. Predominantly 2014-2017.

This series of articles 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? The articles are 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.

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 colored 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 millions of transactions in Internet of things is proving to be a killer cost reducer with potential to value add. The cases have 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 incentivize 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. IBM mainframes has since 2013 been able to process encrypted data without decrypting it. It will be interesting if this also can be applied to P2P trustless architecture.

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.