Blockchain, Crypto, Tokens, NFTs, Stablecoins, Digital Assets, DeFi, Web 3, The Metaverse Explained

by Arthur · February 16, 2023

What are the main concepts used under the umbrella of crypto payments? Understanding the basics of how these work and their long-term impact is essential

Almost every crypto conference you attend, or podcast, webinar, etc. you listen to emphasizes the importance of educating consumers on crypto topics to overcome some of the obstacles this industry faces in understanding how crypto works and adopting it. And it is true, as this space is new, a little different from the traditional world of finance, and quite technological.

During the next lines, we will try to explain some of the key terms of crypto space (such as blockchain, Ethereum, crypto, Bitcoin, stablecoins, CBDCs, tokens, NFTs, digital assets, DeFi, Web 3.0 and the metaverse) briefly.

BLOCKCHAIN – network where all the magic happens

A blockchain is a way to permanently record and access secure information that is very difficult to change afterwards and fully controllable. This is achieved using cryptography, networks and consensus algorithms.

A blockchain is a growing one list of recordscalled blocks, which are linked using cryptography. Each block contains a cryptographic hash of the previous block, a time stampand transaction data. The digital ledger hosts multiple computers – or ‘nodes’ – that track activity (or transactions that occur) between different users. By design is a blockchain resistant to modification of data. Once recorded, the data in a given block cannot be changed retroactively without changing all subsequent blocks, requiring consensus of the network majority.

Unlike traditional models that rely on a single centralized source of truth, the blockchain is said to be “trustless” because the distributed model does not rely on universal trust in a single entity. Different models of blockchain networks enable different degrees of contribution, permissions and roles for participants. These models are public blockchains, private blockchains, consortium blockchains and hybrid blockchains.

Types of blockchains

1. Public blockchains are blockchains open to the public and has no access restrictions.

Public blockchains are sometimes referred to as “permissionless” blockchains because no one authorizes anyone else to interact with the protocol. Thus, any user with access to the Internet can send transactions to it in addition to becoming a validator (i.e. participating in the execution of a consensus protocol). As the network must create value, promote cooperation between participants and be secured, participants are incentivized (e.g. rewarded with crypto/tokens).

Because anyone can use a public blockchain to send and receive transactions (data), the network can become congested and slow. Also, if there is a lot of activity on a blockchain, transactions can take a while to process and network fees can increase. Some of the largest, most well-known public blockchains are Bitcoin, Ethereum, Stellarand Hyphen.

Some info about Ethereum

The Ethereum universe is mainly dependent on Ethereum Virtual Machine or EVM (a canonical computer whose state everyone on the Ethereum network agrees on), network participants (Ethereum nodes), Ether (ETH – the original cryptocurrency of Ethereum), accounts (where ETH is stored), transactions (the formal term for a request for code execution on the EVM), smart contracts (reusable piece of code that a developer publishes in EVM state).

Nodes keep a copy of the state of the EVM and can broadcast a request for this computer to perform arbitrary computations. When such a request is broadcast, other participants on the network will verify, validate and execute (‘perform’) the calculations. This execution causes a state change in the EVM, which is committed and propagated throughout the network. Cryptographic mechanisms ensure that once transactions are confirmed as valid and added to the blockchain, they cannot be tampered with later. The same mechanisms also ensure that all transactions are signed and executed with appropriate “permissions”. The processing cost of the nodes is paid by the transaction initiator, using ‘gas’, which is an ETH fraction (‘gwei’).

Ethereum vs Bitcoin – What’s the Difference?

Often referred to as a first-generation blockchain, Bitcoin was not created as an overly complex system, and it is a strength when it comes to security. The smart contract language in Bitcoin is extremely limited and does not lend itself very well to applications outside of transactions.

The second generation blockchains enabling a greater degree of programmability on top of financial transactions. Different from Bitcoin’s blockchain, Ethereum enables the creation of decentralized applications (dapps) which combines a smart contract (a script that, when called with certain parameters, performs some actions or calculations if certain conditions are met) and an interface for interfaces.

2. Private blockchains are permissioned blockchains where participant and validator access is limited and those interested in joining the network must be invited by the network administrators.

Although members of the private blockchain network are known to each other, the transaction details are privateand the central authority (the company or business) decides who can read the transactions. Private blockchains offer more efficiency and faster transactions for private businesses than public blockchains.

Transactions on both public and private blockchains are verified by consensus, but there are many ways consensus can be achieved. In a private blockchain, consensus is usually achieved through a process called selective approval. It is based on the concept that network participants have been given permission to be there and that the participants involved in a transaction can verify that.

The most common examples of private blockchains are Ripple (XRP) and Hyperledger.

3. Hybrid blockchains are blockchains that combine centralized and decentralized functions. In an ideal world, this type of blockchain would mean controlled access and freedom at the same time.

The blockchain network is controlled by one entity that decides who can access specific data stored in the blockchain and which data will be open to the public. The hybrid blockchain protects users from privacy-related issues, but it still allows third-party communications such as shareholders and the public.

Examples of this type of blockchain include XinFin used for remittance, peer-to-peer trading platforms, blockchain-powered insurance and online digital asset-linked identity, or LTO networkwhich focuses on Decentralized Identities (DIDs) and Verifiable Credentials (VCs) to help improve existing identification methods, replacing anonymity with privacy.

4. Consortium blockchains are blockchains controlled by several companies which act as nodes. These are designed by a group of multiple entities that want to use a decentralized network to collaborate.

Consortium administrators limit users’ reading rights as needed and allow only a limited set of trusted nodes to execute a consensus protocol. In this blockchain, the number of participants is known and verified, and authentication is performed to reduce the risk of data and privacy threats. However, because the development speed of this blockchain depends on the cooperation between the participants, it will stop the progress if the participants cannot reach an agreement.

Examples of consortium blockchains are Quorum from ConsenSys and R3its blockchain platform Corda.

Blockchain technology can be integrated into several areas. Blockchain applications are designed to be applied to multiple industry sectors to reduce costs, increase transparency and fairness, and promote a specific sector’s efficiency. Blockchain applications include supply chain and logistics, healthcare, retail and e-commerce, finance, real estate and real estate, media, NFT marketplaces, heavy industry and manufacturing, music, cross-border payments, Internet of Things, gaming, personal identity security, government and voting, combat of money laundering, advertising, original content creation, automotive industry, smart contracts. For the scope of this report, when we use the concept of blockchain, we are mainly referring to the financial sector.

Watch out for our next installment, where we will briefly explain crypto wallets, Bitcoin, stablecoins and CBDCs.

This editorial was originally published this spring Report on Crypto Payments and Web 3.0 for Banks, Merchants and PSPs. The first edition of our report aims to provide a good payment resource with crypto terms and concepts for those interested in understanding the basics of crypto payments and their long-term impact. Furthermore, it shares practical examples of cryptocurrency-enabled e-commerce and banking services and presents the latest developments in the regulatory landscape. It also reveals which are the most innovative companies in this area, which are building the crypto skins.

About Mirela Ciobanu

Mirela Ciobanu is editor-in-chief for the Banking and Fintech domain at The Paypers. She is actively involved in preparing industry reports, conducting interviews and writing about the digital assets industry, the regtech space, digital identity, fraud prevention and payment innovation. Mirela is passionate about finding the latest news on crypto, blockchain, DeFi and fine crime investigations and is an advocate for the need to keep our online data/presence protected.