Although the theoretical building blocks that form cryptocurrencies existed prior to 2009, it was only in January of that year that Bitcoin registered the first ever transaction on a blockchain.
The very first BTC transmission was stored in the now legendary Bitcoin Genesis Block, and carried an interesting message encoded within it:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
The reference to the 2008 financial crisis is very meaningful in retrospect.
Satoshi Nakamoto was making a statement about currency, the central banking system that govern those currencies and, more explicitly, the financial crisis which exploded the year before.
It was the birth of a new kind of currency, a system which would challenge all the financial instruments we knew and used until then.
Bitcoin was born.
Bitcoin is the first generation cryptocurrency.
The One which started it all and showed the world that decentralized financial consensus was not only possible, but it had already been implemented in software!
Bitcoin software wasn’t particularly elegant, but it worked so well from its very first release, it instantly conquered hundreds of fans who gathered in online communities built around the technology.
Bitcoin spread like fire from the get-go.
It was not only a concept or an abstract idea. It was ready to run and was immediately successfully deployed everywhere.
Bitcoin was a proof of concept for a revolutionary new technology that could be demonstrated anywhere, using a common PC running MS Windows with basic Internet connectivity.
People could instantly send Bitcoins to each other anywhere in the world. Not only that but, by just running the Bitcoin software, you could actually earn coins for helping run the network! Early in 2009 anyone running a node would earn 100 to 200 BTC per day by just leaving Bitcoin Core running on their PC! Sounds crazy, but there were even Bitcoin faucets where anyone could redeem free coins!
Because of its pioneering role, Bitcoin forms the base for all cryptocurrency projects that would appear shortly thereafter. The first generation of cryptos had been launched.
The first generation cryptos is composed of Bitcoin and all the coins that forked its source code and reused BTC’s basic concepts.
Note: Blockchain Forks are not always the same as Software Forks
A software fork is a concept derived from open source software development and means that programmers decided to take a software project and make modifications to it under a separate source code tree. Blockchain forks, on the other hand, happen when the blockchain of a cryptocurrency has followed at least two new different paths, forming two separate blockchains. Cryptocurrency source code forks often do incur in blockchain forks, but technically they’re two separate concepts.
For example, Litecoin was a popular early Bitcoin fork, and so was Dogecoin (a step apart, after forking Luckycoin).
These 2 very popular software projects simply forked the Bitcoin source code tree, changed the logo and the mining cryptographic hash function (from Bitcoin’s SHA256 to the more memory-intensive scrypt algorithm). With these simple changes, a new cryptocurrency was born!
Noticing how easy it was to create new coins based on Bitcoin Core source code, other (software) forks soon followed and, while we won’t be able to list them all here, they all shared some common traits.
Throughout the first generation, developers would follow BitcoinTalk instructions on how to fork Bitcoin to create their own new blockchain. Several threads there taught users how to create their own crypto.
All first generation cryptocurrencies have these things in common:
These are the main traits of all 1st generation cryptocurrencies.
While there were variations in source code style, all of them based their initial releases on the existing Bitcoin base.
Several programming languages began to be used other than the C++ language used for Bitcoin. Concepts from the Bitcoin source code tree quickly became available in many other programming languages.
One of these programming language translations would spark a revolution that would both hurt Satoshi’s original vision and also launch the world into a graphics card buying spree.
When Bitcoin mining code was migrated to the AMD Radeon GPU graphics cards’ API, called OpenCL, the world would never be the same again.
GPU’s could run thousands of times more numeric operations than the best CPU’s could ever hope for.
GPU mining killed CPU mining and ended the romantic era of Bitcoin’s fully P2P network of full mining nodes.
ASICs later appeared which killed GPU mining and the rest is history.
Bitmain is one of the world’s largest ASIC manufacturers and their Antmain mining machines provoked a second revolution in Bitcoin mining. All these developments set the reality farther and farther away from Satoshi’s original vision where each node, each PC, mined Bitcoins and participated on the network fully. Mining had gone professional and full nodes no longer mined, but simply verified mined transactions.
For years, Bitcoin reigned alone.
Every other coin which appeared seemed to have cloned the concepts behind Bitcoin. Everyone was releasing their own coins based on the original Nakamoto sources.
Meme coins like Dogecoin, “cheaper Bitcoins” like Litecoin promised to be the “silver” of cryptocurrencies (whereas Bitcoin was gold) and so on.
Reddcoin attempted to become the social networking cryptocurrency (without explicitly mentioning the Reddit trademark). Even Iceland got its own crypto, though it was never made official. Those were the crazy early days of cryptocurrencies – everyone was cloning the Bitcoin source code and translating it into various ideas, most of which were only meant to make coin creators rich quick.
For a while, it seemed like cryptocurrencies would be limited to the Bitcoin functionality plus slight changes here and there. But there was one team that was thinking outside the box. And they were building something truly extraordinary : a decentralized virtual machine stored on a blockchain.
It was in the context of Bitcoin clones that a revolutionary new concept suddenly appeared.
It was called Ethereum and it was nothing like any of the cryptos that came before it. For starters, it wasn’t forked from the Bitcoin source tree. It didn’t even use C++ language, which everyone had been hacking around with to adapt Bitcoin to their own projects.
Ethereum used Google’s Go language for its reference node implementation (geth) and Javascript for its front-end components. There was an elegant architecture to it – much different from the C++ spaghetti on Bitcoin. Geth had modularized front and back ends, they separate components with communicating via an API.
Ethereum was ground breaking.
There was one major concept that set ETH apart from every other cryptocurrency at the time. Ethereum wasn’t just a blockchain with a token in it. Instead, it was a Turing-complete virtual machine that ran sophisticated computer programs called smart contracts.
This was the single greatest contribution to cryptocurrencies since the introduction of Bitcoin in 2009.
Smart contracts made it trivial to create new cryptocurrencies. If you follow a set of standard rules which every cryptocurrency needs, then you establish a recipe for new coins. Anyone could create a new coin now, without having to fork Bitcoin.
To differentiate “native” coins, which ran on layer 1, the new coins that ran on layer 2 on top of Ethereum were now called “tokens”.
Anyone could write a ERC20 token smart contract, publish it on the blockchain and a new cryptocurrency was born. Just like that.
Ethereum thus catalysed the ICO boom of 2016 to 2017, where startups from around the world became able to launch crypto assets in a matter of minutes. Crowdfunding had gone globally decentralized. Companies from all over the world raised tens of billions of dollars by issuing Ethereum-based smart contract tokens.
The second generation of cryptocurrencies had begun.
The main traits of a Second Generation Cryptocurrency are:
These characteristics transform the very basic transactions from first generation cryptocurrencies into complete computer programs stored on the blockchain. In Bitcoin, a very trivial script runs and, in the end, if it returns true, then the coins are transferred. The transfer is rejected otherwise.
In Ethereum, this logic can be made infinitely more complex. The Solidity language used on the Ethereum Virtual Machine is able to process any computer program imaginable. It is what we call a Turing-complete language. In theory, you could run anything from Microsoft Excel to Playstation 5 games on Ethereum.
Programs that run on the Ethereum Virtual Machine can, theoretically, solve any existing computable problem known to makind (what we know as computable problems).
The idea was revolutionary at the time. But it wasn’t without its limitations. Ethereum suffered from high transaction fees and very expensive computing time. Users are charged for Ethereum Virtual Machine computing time in a pseudo-cryptocurrency called GAS. Smart contracts spend a lot of GAS for relatively trivial computations.
Soon, researchers noticed that, in order for Ethereum to become a de-facto worldwide virtual machine, they’d need to be able to scale while keeping computing cost reasonable. This research led us to the third generation of cryptocurrencies.
Third generation cryptocurrencies are a concept that expands on second generation cryptos and builds further, more complex, abstractions on top of them.
There isn’t a clear definition of what a third generation cryptocurrency is. Unlike virtual machines and smart contracts, which set a very clear line between 1st and 2nd generation cryptos, there isn’t a unique trait that sets third generation cryptos apart from 2nd gen.
Here, we’ll take a look at some post-Ethereum platforms which introduced interesting new concepts that further advanced the crypto state of the art.
Fro example, Cardano ADA is one of the farthest developed Third Generation Cryptocurrency projects.
While still in the relatively initial stages of an ambitious roadmap, Cardano has already implemented all the traits which establish it as a Third Gen crypto platform. In Cardano, there is lots of concern about compliance and governance, for example. Voting should be done on-chain, in a trustless manner.
Neither Ethereum or Bitcoin share this functionality. Changes made to Bitcoin get decided on (sometimes heated) mailing list or github discussions. Ethereum follows a similar development flow.
Tezos also allows on-chain vote. Proposal transactions get submitted to the Tezos blockchain and TZ stakeholders (stakers) send in their vote about each proposal. Everything gets decided on-chain. If a proposition is approved via the on-chain vote, Tezos nodes will accept to execute the source code which conforms to a special cryptographic hash that was voted on. This intricate system sets Tezos apart from 2nd generation cryptos.
Several other third generation projects exist. For instance, Chainlink uses real world oracles that connect real life events to on-chain events. Algorand has also become very popular by attempting to keep blockchains as decentralized as possible through pure Proof of Stake.
The main characteristics of third generation cryptocurrencies include:
While third generation cryptos have barely gone mainstream, a new class of cryptocurrencies is redefining the state of the art.
They’re cryptocurrencies based on metastable consensus mechanisms, such as Avalanche.
In this class of consensus mechanisms, the network is never fully stable and a given consensus is not immediately set in stone (unlike valid Bitcoin blocks which commit to a specific consensus from the start).
Instead, metastable algorithms are flexible and may change – as long as a large enough number of nodes believe it should change.
Fourth generation cryptocurrencies provide all the 2nd generation traits, plus extremely high transaction per second (TPS) rates, sharding and other scalability enablers, permissioned and permissionless subnets and other features which allow them to compete with centralized systems such as VISA and MasterCard both on TPS and compliance.
Avalanche consensus is surprisingly efficient and is able to reach transaction finality within milliseconds.
In an Avalanche network, nodes query each other in a randomly chosen order.
Nobody is able to predict which node will query which other node. As such, it’s very hard to defraud the system, as you can’t predict who’ll be asked about a certain transaction or block (vertex). By intensively trading gossip, nodes quickly form their own conviction about the validity of transactions. After a certain number of peers is queried, the node will either validate or reject a transaction.
In Avalanche systems, participants arrive at consensus at their own pace, but it all happens very fast. The whole process of validating a block around the world, traversing much of the Avalanche P2P network and forming a consensus usually takes under a second!
It’s also the most decentralized system available – anyone can validate, stake and participate by simply running a lightweight software process. The cost of entry is very low and no special hardware is required. Avalanche is free open source code and runs natively on most platforms.
We hope this short overview of the first four generations of cryptocurrencies has given you a perspective on the evolution of this exciting new technology.
Cryptocurrencies are an open and very fertile field for research and innovative projects are bringing more and more incredible ideas into the mix.
In the coming years will shall see fourth generation cryptocurrencies spring up, building even higher abstractions on top of the previous ones.
While Bitcoin is the father of all these ideas, it is not falling behind technology-wise. Second and third generation ideas are being developed for Bitcoin as layers on top of its core system. Lightning Network is one such layer, which promises to speed up Bitcoin transactions immensely.
The cryptocurrency community is inter-wined and good ideas from one project end up being incorporated into other projects, which is a great catalyst for development.
In less than 10 years since the Bitcoin launch, cryptocurrencies have gone from a crazy idea to a revolutionary concept that has found its way into the world’s financial system. And this is just the beginning!
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