This is probably not the first time you are seeing something blockchain related in your feed. After all, the world is buzzing once again with the hype of blockchain technology and its often seemingly far-fetched promises. Yet here you are, hoping to learn something about this mysterious-looking world of cryptocurrencies and their underlying technology. Chances are, this is not your first attempt at delving into the unknown waters of this space either. Whenever you made the jump, you came back to the surface with nothing more than a sun-burnt back and your eyes red from the salt of blockchain evangelists slapping you in the face with waves of tech-riddled articles. In comparison, what this article tries to achieve is to make that delve worthwhile, so that you may see the many benefits this stream of innovation has to offer. Although I do not proclaim to be an expert navigator of the blockchain seas, I have collected practical knowledge over four years of lurking in the cryptocurrency space. Now I want to use this knowledge to show why this technology is a big deal and how it creates value for people like you.

(This article largely deals with permissionless public blockchains. Naturally, some things are simplified. Keep these in mind.)

Imagine yourself standing on a street’s sidewalk. Look around you, what do you see? To your left a woman is using her credit card to buy her morning coffee. One block away people are lining up to get their vaccination. Behind you a branch of a commercial bank just opened its doors to its customers. On your phone you get a news notification of your representative having voted against his campaign promises in Congress. What is common among all of these situations? That people are forced to trust others. The woman with her credit card? She is placing trust in the card issuer, she is placing trust in her bank, she is placing trust in the currency, and she is placing trust in the vendor. The store is doing the same: it trusts its suppliers, it trusts its payment processors and so on. After this thought exercise, it cannot be ignored that trust is everywhere and is a basic building block of our society. Sadly, the ones we have to place our trust in today have gotten increasingly centralized. Even your local mom & pop shops likely use infrastructure and service providers that are controlled by a major corporation, institution or some other central entity. On top of this, we are seeing more and more instances where these stakeholders misuse and abuse the powers and trust they have been granted by the people. Unsurprisingly then, there is a brewing trend to reject established institutions, systems, and figures. This effect permeates through politics, government, business, and media as highlighted by the 2020 Edelman Trust Index (0–100):

What if you did not need to rely on these parties when doing your daily activities? What if instead trust was guaranteed, and not dependent on anyone? Blockchain is this new structure of trust because in a blockchain system there is no single entity that controls things and the way information is stored and used leaves a permanent trail. Moreover, everyone can be a contributor to the system in a transparent and decentralized fashion. The question everyone rightfully asks themselves at this point is:

Okay, but how exactly does blockchain technology deliver on these promises?

To avoid this article becoming yet another technical mumbo-jumbo littered graveyard, let’s do another thought experiment to answer this question. Imagine you are doing puzzle with your friends where each of you is completing your own but same puzzle. You are doing this in a collaborative way where if one of you finds a piece and realizes where it fits, you as a group check the back of the box and say “yeah, that fits here”. And so you come to a consensus and each of you places new pieces in your own puzzle until you are finished. If someone is regularly calling out fitting pieces, that person gets rewarded for it, let’s say with candies. In a real blockchain setting, it is usually digital tokens bearing fiat currency value.

Blockchains run in a similar way operated by their participants where information is not stored in a central location, but is stored by network participants who share and validate this information collectively. Just like in the puzzle example, everyone has a copy. If others want to join in on the game, they just look at your puzzle and copy it piece by piece until they get the full picture. (If you are familiar with how torrents work, this is the same peer-to-peer principle.) But there is a catch: this blockchain puzzle is not an ordinary puzzle. It is a puzzle set that just keeps on growing with new pieces. The puzzle that previously depicted only a castle now has an entire forest around it with a lake on the horizon. In a blockchain solution this means new blocks with novel information that also have to be validated.

That’s cool but what if you tried to introduce a puzzle piece from another set? Then it would just get thrown out the window by the group because everyone realizes it just does not fit and you are trying to ruin their fun. Hence, there are also mechanisms to discourage bad actors. Just like in a puzzle, the way the pieces (blocks) fit together in a blockchain you cannot just take out one piece and replace it with another. Each piece depends on the others. Everything fits together perfectly.

I used this puzzle game example to get the basic concepts of blockchain across, but it is slightly twisted for simplicity’s sake compared to how a real blockchain looks like. As the name suggests, a blockchain is a single chain of blocks where the blocks follow each other one by one in a linear, chronological way. Each block contains unique information. If we stayed with the puzzle example, this would mean a quite strange puzzle set that only had one infinitely expanding row of puzzles where every new puzzle piece depended on the pieces that came before it — like in an iron chain.

From the technical side, this is done through cryptographic algorithms (hence the name cryptocurrencies). These algorithms ensure this unique construction of trust. One could even say that blockchain is just a shiny piece of code that was designed in a unique way. Yet, this design that guarantees a tamper-proof nature is what makes blockchain so trustworthy. It allows us to have ledgers that store records in an immutable and decentralized way. In other words, you cannot just go back and change something. This alone is a major value proposition that fuels use cases in finance, health care, supply chain management and more as it introduces immense trust and resilience into these fields. Not only that, but this capability can also translate to cost and time savings.

Let’s highlight another part of our puzzle example. Did you notice that there was no one playing boss or bullying others into doing what he/she wanted to do? This is because the group worked together based on distributed democratic consensus where everyone could have a say. Even if the bully wanted to ruin your puzzle, he/she would have had to successfully fight off the group first, which would have been highly unlikely and not a good time for the bully. This decentralization is the second value proposition of blockchain technology after ensured trust and immutability. In the puzzle example, everyone had personal freedom (and responsibility) to participate. More and more players who confirmed the legitimacy of new pieces emerged. These are “node operators” in a blockchain, and generally the more there are, the more decentralized and secure the network is.

If we take a real life example of sending money online to your friend, by the point your money arrives it travels through banks, clearing or payment systems, and others. Why can’t you just give the money directly to your friend without having to trust any one of these intermediaries? Blockchain technology eliminates the need for these intermediaries. You can directly send digital assets from your wallet to the other person’s wallet, just like with cash. The decentralized nature of the blockchain makes this intermediary-free way of transferring value possible as the validation and other processes are outsourced to the network. In this example, the confirmation of a transaction requires multiple participants’ agreement instead of relying on the mercy of financial and other institutions. Which brings us to our next pain points.

Another thing up blockchain’s sleeve is that it is permissionless. What this means is that you do not have to ask for someone’s approval before you can participate. In our puzzle example, you and your friends did not have to ask your parents if you could play. Likewise, they did not just interrupt you mid-game telling you to go do your homework either. Whereas in the money transfer example, the bank had to first check your personal details and other information when you first opened your account and continued to retain control over your ability to transact. This only scratches the surface, but the larger financial control grid is more pervasive than one might think. This 2017 speech by Andreas M. Antonopoulos explains how limiting the current financial system is with economic exclusion, financial censorship, surveillance, and more:

For instance, one rather overlooked angle when it comes to commercial banking is that you do not legally own the money in your bank account. You simple have a right to that money because you so generously loaned it to the bank. Which money is then used by the bank to finance credit to its customers. In other words, they own your money, not you. This becomes clear during bank runs when withdrawals are mercilessly limited and all of a sudden it dawns on you that your money in the bank is not actually your money. Whereas, blockchain makes self-custody possible where you really are the owner of your wealth and do not have to rely on anyone’s permission to do what you will with your money. If you think more about your daily activities, you begin to realize that we are excessively bound by organizations, conglomerates, governments and other gatekeepers. An advantage with blockchain is that it creates an open environment where everyone is allowed to participate without even the chance for the system to assert control over you.

Blockchain technology also advances democratization of access to financial markets as it diminishes significant barriers of entry. For example, if someone wants to trade stocks or derivatives, through projects like Injective Protocol and Mirror Protocol that person has complete freedom to do so without the tedious brokerage registration, the long and cumbersome clearing and settlement processes, and unnecessary intermediaries asserting control at every step. In simpler terms, it also allows anyone to send and receive money.

This unfettered openness does not stop at the enjoyment of what the network makes possible (like boundless money transfer), but it also means the concrete running of the network, creating a space that is decentralized and open, both in terms of operating the network and in terms of using it. Ultimately, it lets users be in control of the system they are using themselves. This also means that the network cannot just be turned off, as it lives on the back of the participants which makes it censorship resistant.

One could say, this is where it all the magic comes together and where blockchain technology really shows what it is capable of. Take the previously mentioned points of decentralization, openness, and immutability together, and add on top of them a programmable environment that can be designed to execute almost any action and you get what the techies refer to as smart contracts. These contracts are different than normal contracts in the sense that they execute automatically by themselves if the terms of the agreement are met. Simply, if one thing happens another thing will happen with certainty, without the need for interruption from anyone. These contracts can be anything where agreement and actions are involved between parties.

This programmability allows solutions to emerge such as lending protocols where you can loan or borrow digital assets (such as bitcoin or even fiat-pegged tokens such as USDC) without any central authority telling you what you can or cannot do, while interest payments are also automatically assured. Further examples are Decentralized Exchanges (DEXs) where the liquidity to facilitate trades is pooled together from the community (aka liquidity providers). These providers earn yield in return for providing their digital assets to be used as liquidity in exchanges between two digital tokens. Another use case can be found in governance where owners of a digital asset are granted voting rights in how a network or protocol should operate. This is how decentralized autonomous organizations (DAOs) work, a unique type of organization that is self-governed such as Cardano’s Project Catalyst or SingularityDAO. There could be so much more to explore here. The point is that programmability and smart contracts enable us to design immensely better systems in a vast array of industries that enhance individual sovereignty. They open the doors to customizable solutions where those solutions did not exist before and make things like programmable money possible. Scott Stornetta, who is considered by many to be the co-inventor of blockchain technology, worded it this way at the 2021 Inevitable World Summit:

“We have the chance to go back to our original ownership of our own unalienable rights and rebuild the structures that we want to execute on our behalf. […] We want to empower certain constructs to exercise our individual autonomy”

Of course to make all this possible, information has to be processed somewhere. Sticking to decentralization, this is not done by huge data centers that are controlled by companies but is done by the participants themselves in a distributed fashion as each participant can contribute with their own processing power and get rewarded for it proportionally. This way immense processing power becomes available for use cases in artificial intelligence (e.g. SingularityNET), cloud storage (Filecoin) and more including the fueling of major protocols like Ethereum.

Digitization (or tokenization) of real-world assets has been a prominent trend in the industry for years. What it entails is creating representations of these assets on the chain in the form of digital tokens. Why is this a big deal? Because with tokenized assets, previously illiquid assets can be exchanged in real time getting rid of processes that have traditionally been full of hassle. Examples include precious metals, real estate, and venture capital. For instance, in real estate an apartment complex can be divided into parts that are each represented by a token which tokens then can be put on the market. The value for the new landlord is access to a property that would have been inaccessible otherwise due to a too large upfront investment or regulatory/administrative limitations. Furthermore, as this can allow properties to be co-owned by multiple people, it also makes things like proportionate rental income possible. Therefore, a previously illiquid asset can be transformed into a liquid and accessible one with added value on top.

Although there are remarkable use cases with blockchain technology, most projects are struggling with what is referred to as the trilemma between decentralization, scalability, and security. For example, although some projects provide decentralization and security at a high level like Bitcoin, scalability remains an issue. This can show itself in elevated transaction times and transaction costs as the network gets congested. Ethereum, a champion of smart contracts and programmability, is also plagued with high transaction fees. Solving such scalability challenges often requires compromising on either decentralization or security. Despite this, there are potential solutions on the way.

Code remains code. Although there is no need to trust intermediaries, you still have to put some trust in the network that it will work the way you want it to. Although Bitcoin and Ethereum, two of the largest projects have a relatively solid track record, there is always a chance for exploits to surface in most protocols that might undermine the network’s security. Then again, a lot of things we use today are running on exactly the same thing: code. And in many cases, open-source blockchain projects are more rigorously tested than conventional ones we use today. Just think of the dinosaur-era systems most insurance providers still use in their operations, not to mention cybersecurity vulnerabilities and data breaches.

There is no hiding it. As it stands today, most blockchain applications have complicated and not so user-friendly customer journeys that cripple mass-adoption. If one looks farther than cryptocurrency exchanges, direct participation in blockchain protocols usually has high technical barriers of entry that the industry will have to solve over the years if it wants to attract average consumers.

Because there is no central authority, no asking for permission, no safety nets, an unusual amount of responsibility lies in the user when interacting with blockchain projects. An easy example is if you send money to the wrong recipient, there is no going back, no customer support to call. Poof, that money is gone. Yet, I personally believe that the advantages of decentralized and permissionless systems far outweigh these risks. Still, users must exercise ownership over their activities which comes with a good understanding of the given project.

Since the blockchain scene is relatively new, there is a lack of regulatory frameworks that address the unique services built with this technology. The eternal debate if cryptocurrencies are commodities or securities is still largely with us, tokenization is covered in a thick mist of regulatory questions, and there are further challenges around client protection, asset protection, general supervision of service providers, trading, AML & KYC processes, taxation, risk awareness and more. Yet, there is hope on the horizon with the likes of Liechtenstein recognizing blockchain projects with what they call “transaction systems based on trust technologies”. Switzerland has also been at the forefront of this regulatory innovation, most recently with what is referred to as the Blockchain Act and a vibrant blockchain ecosystem further supported by the Crypto Valley Association.

Nothing starts out perfect. Take Spotify, Netflix or any other service you enjoy. Chances are, they were nothing like what they are now. No, it took years and years of work and tinkering to get them to where they today. In another example, who could have predicted in the 1990s what the internet will bring in thirty years? In the same vein, with blockchain seeing what is possible is key. Already as we speak there are many legitimate projects putting concrete results down on the table which are getting us closer to seeing what lies beyond the horizon. Proposals to solve scalability issues are also in the pipeline such as Eth2 with Ethereum. A beneficial side-effect of the immaturity of the space is that current inefficiencies are captivating many startups to enter the scene and try their hands at solving these problems in their own way with unique selling propositions on the side that increase experimentation potential and innovation further. The point is, we can improve on today’s challenges. One day, whether in 2, 3, or 5 years we will get to a point where certain protocols are perfected and ready for mass-adoption and the incredible promises of blockchain technology will come to worldwide fruition. With this natural strive for innovation in the air and the rapid development of the ecosystem fueled even by institutional interest, I remain persistent that blockchain at its core is not just a silly buzzword thrown around without meaning.

Rather, it is an innovation that finally advances technology to our benefit with no veiled privacy violations, no corporate censorship, and no further centralization. It empowers us individually and as communities without the need for excessively large governments or power-hungry corporations that could overstep their authority.