Ever since the invention of Bitcoin and Ethereum, the crypto community has been contemplating different applications of the blockchain technology, from real estate and healthcare all the way to energy and sustainability. The promise of this revolutionary technology seemed far reaching (to the enthusiasts, at least).

However, at the time of this blog entry (early 2022), most of those visions remain just that, visions. Despite the advances in blockchain infrastructure over recent years, significant challenges (e.g. usability and scalability) must be overcome before mainstream adoption is possible. Therefore, the use cases discussed below are largely popular within the crypto community only. 

Main Use Cases of Blockchain Today

Views on Some Criticism of Crypto Use Cases

As with any new technology, there’s just as many critics as proponents of crypto and blockchain. While some criticism is valid, others are not. Below I offer my views on some common criticisms we hear in the media today. My thinking also evolves as I learn, so please don’t be surprised if I change my tune in the future. Also, nothing below is investment advice.

“Bitcoin [or any other cryptocurrency] is just made up and shouldn’t have any value”

❌ Sure, Bitcoin is made up, but so are the US Dollar and other fiat currencies. The US dollar has value because everyone believes it has value, and thus uses it as a medium of exchange and store of value. While cryptocurrencies may be overvalued at a given moment, it doesn’t mean they have zero value. 

“Blockchain is too slow / expensive / hard-to-use to be useful”

🟡 Yes, agreed; however, the world’s first computer was a huge mainframe machine that was slow, expensive, and hard-to-use. I wouldn’t dismiss a technology based on what it is today. 

“NFTs are just JPEGs and have no utility (thus worth nothing)”

❌ Image-based NFTs (incl. 2D, 3D, animated) derive utilities from two sources: basic artistic value (it’s pleasurable to look at pretty things) and status symbols premiums (owning a Bored Ape makes one appear cool to friends / social media followers). Note some NFTs give owners in-real-life rights such as access to concerts or museums, which clearly have utility. 

“But I can just copy and paste those NFT pictures… ”

🟡 Yes, you can! You can also print off Mona Lisa, but your printout is not nearly as valuable as the original. It’s all a social mind game...

“There’s a lot of hype and bubbles in crypto / NFT / DAO etc.”

✅ Agreed. While the technology is promising, it’s still early. Not all of it is hype and bubble, but a lot of it is. Tread carefully. 

Coming Up Next

Two of my classmates and I have been doing independent research into crypto entrepreneurship, under the guidance of a professor at the Stanford Graduate School of Business. We’ll explore the similarities and differences in entrepreneurship journeys between crypto startups and other tech startups in the next few entries. 

There’s plenty of information online about blockchain technologies (a16z crypto canon is a great place to start). Instead of offering yet another Blockchain 101 article, I’d like to focus on a mental model that makes it easy to understand the various use cases of blockchain.

Due to its roots in cryptography research of distributed ledger technology, blockchain is often said to be “a growing list of records” (Wikipedia, 2022) or “a shared, immutable ledger” (IBM, 2022). While this definition is sufficient for thinking about the original Bitcoin blockchain, the sole focus on records storage is missing half the picture: computations.

From “Blockchain Ledger” to “Blockchain Computer”

A better mental model is to conceptualize blockchains as giant, decentralized computers with immutable records of historical actions. Technical correctness aside, the “blockchain computer”¹ model is more useful than the “blockchain ledger” model, because the vast majority of crypto use cases are based on “smart” chains like Ethereum (or its layer 2s) and Solana.

Let’s build up this blockchain computer together. Think about everyday laptops or mobile phones. We first strip out the input/output devices (e.g. touchscreens, keyboards, sensors). Then, at the core of a modern computer, it has a processing unit (CPU) that does computations , and some memory/storage units (e.g RAM or SSD) that store the current states of your data (e.g. the current name of this file is ‘version 1.pdf’).

We augment this stripped down computer with an immutable log machine that records all actions taken on this computer (this is the “ledger” piece in the blockchain ledger model). For example, a line on this log may say On April 23, 2022 09:00PM UTC time, Alice changed the file name from ‘version 1.pdf’ to ‘version 2.pdf’. In blockchain jargon, each action is called a “transaction” and each transaction records not only what is done, but also by whom. Note that the log machine has a special rule: you can only add to the log, but not change what’s on there already (i.e. immutable).

This augmented computer is then replicated thousands / millions of times by people independently around the world. Furthermore, through the magic of cryptographic consensus mechanisms, all copies of this augmented computer are always in sync with one another.

There you go - we have a blockchain computer.

Properties of Blockchain Computers

First of all, a blockchain computer should be able to do anything that a normal computer can do - e.g. running software programs or social media platforms, storing data or photos - in the long-term. Currently, existing blockchains (especially the earlier / more established chains like Ethereum) have limitations - e.g. throughput (i.e. speed), scalability, storage capacity. The crypto community is aware of these limitations and newer projects are addressing these issues (e.g. Polygon / Solana for throughput).

So, what’s special about the blockchain computer?

1. Resilience: anyone can run a copy of this computer from anywhere in the world. Except for an extinction-level event, it is nearly impossible to shut down this computer.

2. Immutability: no one can change the data (both the current states and the transactions log), due to cryptographic guarantees / consensus algorithms.

3. Logging (action tracking): every change to data on a blockchain computer is logged, and can be tracked to the identity (i.e. address) that initiated the change

4. Verifiability (audit-ability): anyone can look into the blockchain computer and get satisfaction that everything is running properly (because you can trace all the data changes and who changed what).

Ultimately, the properties above mean you can trust a blockchain computer². You can trust that 1) it’s always running correctly according to its code, 2) it’s not been tampered with, and 3) it will not disappear. It is this core tenet of trust that enables various blockchain applications, such as cryptocurrencies, token systems (NFTs and fungible tokens), digital identities, and DAOs (decentralized autonomous organizations).

Example: NFT Collection as a Computer Program

Let’s apply our mental model to NFTs. When someone creates an NFT collection (e.g. Bored Ape Yacht Club), they essentially install an NFT software program (e.g. the BAYC program) on the blockchain computer. These NFT programs are called “ERC721 smart contracts” and each NFT collection has its own smart contract (e.g. BAYC is its own contract and Azuki is its own contract).

An NFT program commonly has some functions (“interface”) that people can call to interact with the program (Entriken, 2018):

1. Read functions: these are typically free (i.e. no gas fees) functions that will give you an output that tells you the current states stored in the program. Two functions to highlight:

   1. ownerOf(tokenID): returns the owner address of an NFT based on the tokenID (tokenIDs are identifiers / serial number for the NFT)

   2. tokenURI(tokenID): returns a link to the NFT³ based on the tokenID

2. Write functions: these functions make changes to the NFT program and will typically cost gas fees. Note that because write functions make changes to the NFT program, when someone activates write functions, their actions are recorded in the log machine. The most important write function is transferFrom.

   • transferFrom(sender_address, receiver_address, tokenID): transfers ownership of tokenID from the sender_address to the receiver_address. Whoever calls this function must be the owner of the tokenID⁴. In essence, this function updates the owner address of tokenID in the NFT program.

In summary, imagine that there’s an NFT program always running on this blockchain computer, and you can ask it who owns which NFT and the owner of an NFT can ask the program to update its records to give the NFT to another person. Because we all collectively trust this NFT software program, we trust someone to be the true owner of an NFT if the NFT program tells us so.

Quick tangent: when you “buy” an NFT, you essentially pay the previous owner to activate the write function to update the ownership record of that particular NFT to you⁵. More interestingly, most NFT art is not actually stored on-chain due to storage cost reasons. The NFT program provides you with a link to the NFT art that is stored elsewhere³ (e.g. a decentralized storage like IPFS or Arweave).

Coming Up Next

We will explore more use cases of blockchain in my next blog. Stay tuned!

Footnotes

1. I’m avoiding the words “Internet Computer” as there’s a blockchain project with such a name. It’s cool. Check it out: https://dfinity.org/

2. Throughout this article, technical rigor was lowered in favor of simplicity and ease of understanding. Nothing is 100%. There are various ways through which consensus algorithms may break down and trust can be lost, but those events have a very low probability of happening in credible crypto projects and thus not discussed here.

3. This was an oversimplification. The link is typically to the NFT metadata, which then points to the actual NFT art (be it a JPEG or video or other data).

4. Or otherwise authorized / approved to make the transfer for this NFT tokenID.

5. Or this could be done through a third party marketplace through another set of functions (approval etc.).

References

Entriken, W. (2018, January 24). EIP-721: Non-Fungible Token Standard. Ethereum Improvement Proposals. Retrieved April 24, 2022, from https://eips.ethereum.org/EIPS/eip-721

IBM. (2022). What is Blockchain Technology? - IBM Blockchain. IBM. Retrieved April 23, 2022, from https://www.ibm.com/topics/what-is-blockchain

Wikipedia. (2022, April). Blockchain. Wikipedia. Retrieved April 23, 2022, from https://en.wikipedia.org/wiki/Blockchain