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As a blockchain developer, you must learn about different technologies and trends that have dominated the blockchain space. This blog post will walk you through sidechains, atomic transactions, atomic swaps, non-custodial wallets, Layer 2 blockchain solutions, IDOs, and Turing Complete smart contracts.
Make sure to understand each concept because many blockchain companies expect blockchain developers to understand the concepts that have shaped the blockchain space.
Let’s look at the first concept, which is atomic transactions.
An atomic transaction allows you to group multiple transactions to be submitted at one time. If any of the transactions in this group fails, then all other transactions in this group fail as well. In other words, an atomic transaction guarantees that all transactions succeed or fail.
Now you might wonder why developers would want this functionality? For instance, this is particularly useful for decentralized exchanges. When both parties agree to exchange assets, they both create a transaction and group it as an atomic transaction. Therefore, if one transaction fails, an atomic transaction guarantees that the other transaction will also fail. This characteristic is important because you don’t want to send an asset to an unknown person without receiving the promised asset in return.
Smart contracts facilitate atomic swaps, which allow users to exchange assets without using a centralized exchange. Most often, two different blockchain platforms would use an atomic swap contract to make their tokens interoperable.
These contracts would use Hash Timelock Contracts (HTLC), which are time-bound smart contracts that require the involved parties to confirm the transaction within a specified timeframe. If this happens, the transaction succeeds, and the contract exchanges the funds. Thus, it allows users to safely exchange tokens without using a centralized exchange.
However, this technology has become less popular as it comes with some disadvantages, such as the slow trading speed and few people using these services, causing price slippage.
Fun side note: The first atomic swap ever was conducted between Decred and Litecoin in September 2017.
A non-custodial wallet gives you full control over your funds because you own the key pair for your wallet. In other words, only you know the private key to unlock your wallet. However, when you lose the private key to your wallet, it means you lose full access to your wallet. Therefore, it’s important to store a backup key for your wallet somewhere safe if you forget or lose your private key. Unfortunately, you’re not the first person to lose the private key to its wallet.
Most people prefer to use custodial wallets hosted by exchanges. Often, these are shared wallets where exchanges store the funds for multiple users. They track each user’s balance in a centralized database. Of course, it’s much easier to access your wallet or retrieve access when you’ve lost it. However, you sacrifice security over the speed of use.
For people who trade on a daily basis, it makes sense to keep their funds in a centralized exchange. Just make sure to know the difference between both.
Many blockchain platforms are trying to implement or have implemented sidechain technology to improve blockchain scalability. Blockchains have to meet an ever-growing demand for scalability. We can increase the block size to store more transactions per block. Unfortunately, that’s not an ideal solution as it requires more processing power to verify these blocks and broadcast them in a timely manner.
Therefore, sidechains allow for faster scaling without altering any of the properties of the underlying blockchain. A sidechain is a separate blockchain that is pegged against the mainchain. This means that both chains are interoperable. It allows assets from the sidechain to move to the mainchain and vice versa.
Using a sidechain, users can transact assets on this chain without congesting the mainchain. On top of that, there’s no requirement for mainchains to store each transaction that happened on the sidechain. Users can transact multiple times, and the mainchain will only store the final balance on its chain when the user decides to swap their assets to the mainchain again.
We all know that blockchain technology is in search of scalability. Sidechains have proven to be a great solution. However, more and more developers started building Layer 2 scaling solutions. When we refer to Layer 2 scaling solutions, we talk about solutions built on top of an existing blockchain platform like Ethereum.
State channels are an example of a Layer 2 solution that allows users to execute multiple transactions but only record a single transaction. For instance, you agree with a person to pay $10 each day for an entire month. In this situation, you would pay 30 times a transaction fee and congest the network.
Therefore, you can use a state channel where you agree to keep track of all the separate transactions yourself and combine all payments at the end of the month. Instead of paying 30 times a transaction fee, you’ve only paid a transaction fee once.
Note that sidechains are also an example of Layer 2 scaling solutions. If you would like to learn more about Layer 2 solutions, check out the Plasma solution, where designated individuals make sure to move transactions from the Plasma chain to the mainchain.
The topic of IDOs has become wildly popular for raising capital among the crypto ecosystem. While ICOs were hot in 2017, an IDO is the new fundraising model of 2020 and forward.
Instead of selling tokens for a fixed price, an IDO allows investors to start trading the new token immediately. On top of that, liquidity pools make sure that the new token benefits from immediate liquidity. Many ICO projects have failed because there wasn’t sufficient liquidity causing extreme price slippage, negatively affecting the token price and often the project’s long-term survival.
Moreover, an IDO model allows for more fair fundraising because anyone can jump in and buy the token. No pre-sale that offers early investors a better price for their token. For that reason, investors enjoy the IDO model.
A Turing Complete machine can run any program and solve any kind of problem given infinite resources and time. But why does this matter for blockchain technology?
In the early blockchain days, Ethereum branded itself as Turing Complete while Bitcoin is not. A computer needs to know if it can complete a specific action before executing it because applications run on multiple computers, and there’s no way to take them down. If we create an application that gets stuck in an infinite loop, the whole Ethereum network becomes useless because it consumes all resources. Therefore, by only allowing predictable - Turing Complete - smart contracts, we can predict the outcomes of contracts which is vital for the security of the Ethereum Virtual Machine.
Blockchain developers can use the Solidity programming language to develop Turing Complete smart contracts compatible with the Ethereum blockchain.
Do you want to learn more? Check out the following concepts: Zero Knowledge Proofs, Threshold Signature Scheme, Multi-party Computation, ERC-721 standard, or Liquidity mining and stay tunned for part 2!
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