Blockchain layers PT2

Blockchain Stacking, Explained! The Many Layers of the Next-Gen Technology

 

 

One thing I constantly hear from people who are new to this space is “I don’t understand how all these companies are using different blockchains”. It’s a really valid question…how can Ethereum and NEO both have blockchain platforms? How can they run their dApps on different blockchains if they offer the same service? They’re designed for similar purposes, right? Why keep the code separate when it could be shared between them for efficiency?

Blockchain Stacking, Explained! The Many Layers of the Next-Gen Technology.

The answer to this question is in something called what are known as “layers”. I’m going to save you some time and tell you that we’re not talking about what happens on a physical stack — we’re talking about application layer protocols. Now that we’ve got that out of the way, let’s jump right into it:

What Are Application Layer Protocols?

Before Satoshi Nakamoto introduced bitcoin to the world through his white paper, he had already been thinking about how applications would run on top of a decentralized ledger. He knew there were going to be plenty of people who wanted to build on top of this technology, and he also knew the one thing they’d all need to do was come together and agree on a common set of standards. The reason for this is simple: you can’t run applications (fancy layman terms for dApps) over an open-source system if everyone isn’t using it.

What we’re seeing today — whether we know it or not — is the result of Nakamoto’s vision. His belief that “the power of decentralized systems” could be used by developers to create concepts and applications that could reshape how we look at the world today … and those ideas are still being worked on right now.

What makes these application-layer protocols so different from one another?

For the purpose of this article, I’m going to focus on how Ethereum stacks up against NEO, so bear with me. In regards to how they work and what makes them different from other top blockchains in crypto right now, there are a few things we need to talk about:

  1. Consensus Mechanisms: How a blockchain reaches consensus about a new block added to its chain is important because it ensures that all applications that run over it will be able to communicate with each other using these rules. There are two popular consensus algorithms used today: Proof of Work (PoW) & Proof of Stake (PoS). Both have their own pros and cons. For example, PoW consumes an enormous amount of energy, as computers work to solve complex mathematical equations. Meanwhile, PoS doesn’t necessarily need a lot of computing power, but it can be harder to implement and take longer for your transactions to go through.

Bearing this in mind, the first layer of Ethereum uses a Proof of Work consensus mechanism referred to as Ethash or “dagger-Hashimoto”. On the other hand, NEO has two different ones: Delegated Byzantine Fault Tolerance (dBFT) & Practical Byzantine Fault Tolerance (PBFT). The main difference between these is that dBFT works with a few select validators whereas PBFT chooses validating nodes from all over the network instead. In any case, both have been proven effective for how they work, but which is better? It’s hard to say.

  1. Language: You’ll need to use some form of bytecode language that works with the existing blockchain(s) you’re developing on top of. NEO has its own proprietary language called “NEO” (formerly known as Antshares), while Ethereum uses a programming language called Solidity. If you want to learn more about what languages are used for dApps on these platforms, check out our article on understanding the different types of blockchain development.
  2. Virtual Machine Support: Developers who work with smart contracts will be able to do so thanks to virtual machines (VMs). Not all blockchains support them, but if they do then there are usually two different types of VMs that developers can use: i) the Ethereum Virtual Machine (EVM) & ii) the NEO Virtual Machine. The EVM is an open-source virtual machine designed specifically for working with Solidity. On the other hand, NEO comes with its own proprietary version (NEO VM).
  3. Transaction Costs: Every blockchain has a different approach to handling network congestion and scaling issues, including how it deals with transactions fees. For example, some blockchains charge more fees during peak hours, while others adjust their transaction costs according to changes in demand on their ledger or even work off of a system where users pay miners directly instead. This factor becomes important if you’re creating your dApp on top of existing layers because it will affect how people interact with your project.
  4. Development Tools: If you wanted to start building a smart contract on Ethereum, then you’d need to download their official client (Ethereum Wallet), whereas things are slightly more complicated for NEO because they don’t have one. For example, if you want to develop on top of NEO, then you’ll need to use either the command line or the Neon Web IDE after downloading it from Github. Another difference is that while Ethereum has separate clients for developers and users, NEO does not currently operate this way. As such, everyone who uses the platform will have access to developer tools in some form or another.
  5. Programming Languages: Not all blockchains support high-level programming languages … but if they do, then there are some key differences in how they handle that implementation. For example, Ethereum uses a language called Solidity which is a contract-oriented programming language designed to target the Ethereum Virtual Machine (EVM). On the other hand, NEO comes with its own proprietary version called “NEO” which is similar to Java and C# in the sense that it can be converted into bytecode before being deployed on their blockchain.
  6. Privacy: In order for your dApp or token to have value within an ecosystem, you’ll need to ensure that its users’ information remains secure from prying eyes. Unfortunately, most public blockchains aren’t very good at this unless they have some form of protection like Zcash’s zero-knowledge proofs or Monero’s ring signatures. If you want to learn more about zero-knowledge protocols, check out our explanations on how they work and the potential use cases they have.
  7. Performance: One of the biggest reasons developers choose to build their dApps on top of one blockchain over another is because of performance. For example, the Ethereum Virtual Machine (EVM) is known for being clunky, whereas NEO has been criticized for having low transaction processing speeds. In both cases though, things are likely to change as these platforms continue to evolve.
  8. Backed by Businesses or Community? It’s important to understand that some blockchains are backed by either businesses or communities … others benefit from both efforts in tandem. For example, the Ethereum project is backed by a company called “Ethereum Foundation” (which owns about 18% of all ETH tokens), whereas NEO is basically owned and operated by its community (who collectively own 100% of their tokens). While there are advantages and disadvantages to both approaches, it goes without saying that having a business-backed blockchain will generally result in more funding allocated towards development – at least in theory – as well as other longer-term incentives like marketing and networking.
  9. Scalability: In order for blockchains to support widespread adoption, they’ll need to handle millions of transactions per second. That’s why so many developers have been working on various methods to improve scalability since it can have a dramatic impact on how quickly a dApp is developed. ETH, for example, is moving towards a proof-of-stake consensus algorithm which should allow them to handle as many as 500 transactions per second. NEO, on the other hand, offers faster transaction processing speeds by comparison (which can hit 1,000 TPS if you pair it with their new Trinity protocol)… but at the cost of decentralization.
  10. Supply: One thing that almost all cryptocurrencies have in common – whether they’re proof-of-work or proof-of-stake – is that tokens are generated through mining efforts and issued over time. Ethereum’s supply policy has been known to be quite flexible, whereas NEO was designed from inception to only release 100 million tokens during its entire lifetime.
  11. Emission: Not all cryptocurrencies release new tokens over time … in fact, most of them only generate a limited number of tokens during their initial launch and then stop creating more after that point. For example, NEO’s emission policy means they will only issue 100 million tokens ever, whereas ETH’s inflation rate decreases with each block mined (which means issuance eventually stops altogether). Alternatively, coins like Binance Coin (BNB) are based on the Ethereum network but don’t follow its emissions protocol since they’re not technically ERC-20 tokens. Instead, BNB is created by exchanging ether for BTC at a one-to-one ratio before being burned to create an equal amount of BNB in return.
  12. Privacy: Some blockchains have been created with privacy in mind from the start, whereas others have been built to offer more transparency. In order for a blockchain to be considered private by default, transactions need to be encrypted on the fly and added to a pool that only the sender and recipient can view; this is usually referred to as “unlinkable” or “anonymous” since anyone who tries to follow the transaction trail will hit dead ends. The downside here is that these blockchains typically don’t feature smart contracts (or other advanced functionality)… and even if they do, native tokens lack liquidity natively because not many people use them.
  13. Smart Contracts: While most cryptocurrencies focus on bridging the gap between digital and fiat currencies, the most popular blockchains have been designed with smart contracts in mind from day one. In theory, smart contracts can be used to represent a massive range of situations and outcomes … which is why Ethereum has become a go-to platform for token crowd sales. The downside is that they require developers to learn new languages like Solidity, as well as understand how things work under the hood.
  14. Governance: Most cryptocurrency communities are decentralized by default, but some projects aim to give users more say over changes or feature implementations than others. For example, NEO holds semiannual elections for its consensus nodes (which must hold at least 1,000 tokens)… whereas ETH only allows token holders to vote on important matters if they also own some “gas” tokens.
  15. Voting: Some blockchains come with built-in governance mechanisms, while others are designed to reward early adopters… but few cryptocurrencies have both. For example, NEO rewards people who hold onto their coins by giving them voting privileges in the future, whereas PIVX offers higher staking returns for anyone who votes on new proposals or consensus changes.
  16. Staking: If you want to own a master node on the Dash network, you’ll need 1,000 DASH as collateral… which means it costs at least $280,000 to become one of the first 1,500 nodes on that particular blockchain. Even though some masternodes can be run using lower amounts of the cryptocurrency (as little as 10 tokens on some wallets), it’s still not always worth the cost in most cases. For example, if you were to run a masternode on DASH with the current price of around $270 per token, your costs would amount to roughly $14 per day… which means you’d be losing money in most cases when considering electricity costs plus other related expenses.
  17. Mining: The vast majority of cryptocurrencies are designed to be mined by people who use energy-efficient ASICs … whereas others can only be mined using high-end GPUs or CPUs. Additionally, there are some cryptocurrencies that aren’t awarded through either mining or staking but rather issued over time according to a predetermined schedule (similar to shares) instead.
  18. Energy Efficient: As the price of BTC/ETH continues to rise, it’s getting harder to run a master node or staking wallet based on proof-of-work coins. For example, when Dash first started its master nodes program in 2014, 1 DASH was worth just $11.40… today it requires more than six times that amount for anyone who wants to be part of the network.
  19. Confirmations: While Bitcoin can often complete transactions with fewer hits (five is normal) due to its underlying technology, newer blockchains are designed for higher numbers of confirmations before they’re considered mathematically accurate. For example, Nano has zero-confirmation transactions enabled by default whereas Litecoin features 6 confirmations … as such, it’s faster to send BTC or LTC than it is NANO or LITECOIN.
  20. Micro-Transactions: Although blockchains were initially designed to handle larger transactions (such as those that include a smart contract), there are some coins designed for micro-transactions. For example, IOTA is built around the idea of “internet of things” machines paying each other fractions of coins for services rendered… whereas RaiBlocks isn’t pegged to a single blockchain but instead uses a tree system with delegated nodes to facilitate payments. In the end, both cryptocurrencies face challenges getting people involved but offer solutions that make sense given their respective niches.
  21. Quantum Proof: As quantum computers become more powerful, some blockchains are looking to implement quantum-proof protocols that can’t be cracked. For example, Nano utilizes a few different technologies to “win the lottery” before future blocks are produced, whereas Ethereum is working on something called Casper… which will use proof of stake rather than proof of work consensus methods.
  22. Gaming: Some cryptocurrencies are designed for online gaming platforms. For example, GameCredits provides an in-game payment system for games where users might otherwise have trouble buying weapons or other important items… but it’s not yet ready for mobile devices because the blockchain is still relatively slow despite being less popular than others.
  23. Voting Rights: Although some coins aim to reward early adopters with voting rights, there are several blockchains that enable anyone to vote on changes within the community. For example, Decred uses a system where ticket holders are able to vote on new features or rule changes… whereas Dash allows masternodes to vote on everything from budget proposals to business partnerships. These systems work because each token comes with voting rights attached to it… which means people who hold more tokens have greater influence over what happens within the community.
  24. Algorithms: Just like there are different ways for blockchains to be secured, there is also variance in how each cryptocurrency’s blockchain gets its digital signature algorithm. For example, Bitcoin uses SHA256 while Litecoin uses Scrypt … but some newer coins use other techniques such as X11 Lyra2z, or yescrypt to further prevent any one party from gaining control over the network.
  25. Network Security: Some cryptocurrencies are designed to be secured by multiple layers of other nodes on the network. For example, Decred uses both proof-of-work mining and proof-of-stake masternode votes … whereas DASH is being developed so master nodes can also work as full nodes within the network. When these blockchain networks become more widespread, it’s likely that many will use a multi-tiered setup similar to how DASH does things… which provides increased security for everyone involved.
  26. Max Coins: Although all blockchains have a finite amount of coins that can ever be created, some are designed to either issue more tokens over time (which is commonly referred to as inflation) or even decrease the number of tokens that can be created (which means there will only ever be a certain amount of coins, like with Bitcoin).
  27. Mining: Although anyone can mine cryptocurrencies, most networks rely on proof-of-work mining algorithms that require specialized hardware to run… whereas some currencies have created new types of consensus mechanisms such as proof-of-stake and delegated proof of stake. In both cases, the point is to decentralize mining – which takes away control from any one party – so no one government or corporation can influence or control a cryptocurrency’s blockchain.
  28. Transaction Speed: One reason why blockchains are gaining widespread adoption is that they offer cheap and fast transactions. For example, Bitcoin processes transactions at an average of 2.5 minutes per block … whereas Ethereum typically only takes 14 seconds to process each transaction. But some newer coins are offering even faster times of less than a second.
  29. Transaction Fees: Of course, not all cryptocurrencies are designed with the intention of being used as currency… which means their transactions aren’t necessarily free. Instead, some currencies have implemented transaction fees, which vary on a sliding scale depending on how much money is involved in any given transfer or exchange. Although this might seem counterproductive, it actually encourages people to spend more of the currency instead of hoarding loads of it for later use… which makes for better liquidity down the road.
  30. Private Transactions: Not all blockchains are designed to be open access for everyone… which means there are some cryptocurrencies that offer private transactions. For example, Dash allows people to send money either privately or publicly, whereas Monero provides total anonymity by allowing users to use stealth addresses.
  31. Decentralized Applications: Another reason why blockchains are gaining widespread adoption is that they allow for the creation of decentralized applications (DApps) … which means no single party can take control or interfere. For example, Ethereum has created a DApp platform called EVM that allows anyone to create DApps and even earn ETH tokens by doing so.
  32. Market Cap: The market cap describes how much money all outstanding coins are worth in total… and it’s usually measured by multiplying the price of each coin with the total number of coins that have been issued. So for example, if a cryptocurrency has 10 million coins and they’re worth $1 per token, then the market cap is $10 million.
  33. Controlled Supply: Whereas mining determines how new tokens are created, the controlled supply is how much of that token can ever exist down the road. For example, Bitcoin has a controlled supply cap of 21 million coins, whereas Dash has an inflation rate of 7.1% per year to account for new coins being mined.
  34. Open Source: Before anyone can use or download any cryptocurrency, it first needs to be published online as open-source software … which can then be copied to create the same coin again. This is done so anyone can publicly audit, suggest changes, or even copy the code and make their own version of it… which allows for a large number of coins because they’re all based on the same platform.
  35. Closed Source: On the other hand, simply copying open source software and creating a new cryptocurrency isn’t enough to warrant making it off-limits for everyone else. So in order to prevent copycats from scamming people, some cryptocurrencies are designed to be closed source and keep their code hidden from public view. This is often done so when bugs or glitches arise in the code, they can be fixed quickly without anyone else knowing the code’s weaknesses.
  36. Platform: Some cryptocurrencies are designed to be more than just regular money … which means they’re also laid out like programming platforms that allow developers to create decentralized applications (DApps) and even issue their own tokens on top of them. An example of this is Ethereum, which offers its own proprietary coding language called Solidity.
  37. Sidechain: Similarly, some cryptocurrencies are even designed to link up with other blockchains… or “sidechains”. An example of this is Rootstock, which allows DApps built on the Ethereum platform to operate off the main chain without clogging it up.
  38. Cryptocurrency: And finally, some cryptocurrencies are just called… “cryptocurrencies” (MXR, BCN, etc.). This is because they’re designed to act as money, but aren’t pegged to anything tangible like gold or silver. Generally speaking, these currencies are only worth something if people think they’re valuable.