Blockchain is a decentralized and distributed digital ledger technology that had Bitcoin as its first use case. It is a digital ledger. Using Blockchain it is possible to record transactions across multiple computers in such a way that the recorded transactions cannot be altered retroactively without modifying all subsequent blocks. This ensures the integrity and security of the data.

Each block in the chain contains a series of transactions, and whenever a new transaction occurs on the Blockchain, a record of that transaction is added to the ledger of all participants.

This chain of blocks is arranged in chronological order and the link between them is made via asymmetric cryptography, such that, to alter transactions recorded three blocks ago, it is necessary to break both encryptions of the blocks subsequent to it.

Using the Bitcoin Blockchain as an example, we have a block registered approximately every ten minutes. This block has the hash1 of the previous block recorded in it, which will be part of the hash that will be created for this block as well. Therefore, to get to the hash of three blocks back, you need to decipher each of the hashes of the subsequent blocks, until you reach it. If you only change one transaction in a block, the chain will automatically reject that block, since the hash of the subsequent block will not recognize it. It is like a growing chain of passwords, where, to discover the password of an item that is lower in the chain, you have to decipher them one by one, starting from the most recent, until you get there. You need to do this quickly, because in ten minutes a new block will be registered, containing a new hash, which will need to be the first to be deciphered.

This chain of blocks, or interconnected hashes, is what allows us to say that, after we have six consecutive blocks of the Bitcoin network recorded, the data in the sixth block is immutable. Not that the data from the most recent blocks is not, but that, given that the way to decipher this hash is through trial and error, after six blocks, even if we used all the current global computing capacity we would not be able to decipher the five hashes in less than ten minutes.

Another important parameter that makes Blockchain resistant to tampering and fraud is its consensus mechanism. The best-known are: the Proof of Work (POW) mechanism, in which the transaction validator proves to have the greatest execution capacity and, thus, gains the right to register the operation; and the Proof of Stake (POS) mechanism, in which the validator must be the one with the most tokens at risk in a given network. In other words, it is the one who has the most to lose if the registered operation is fraudulent and the value of the network and its token decreases.

These consensus mechanisms are important, among other reasons, because we are talking about open-source protocols and structures, meaning that anyone can copy the code and launch a very similar platform or infrastructure. Thus, the cost of doing a Ctrl+C and Ctrl+V is minimal. There are no intellectual property issues or anything like that. This highlights another point of these networks, which is that the community around them is one of the important factors in their value.

It is crucial to understand that Blockchain will be the technology that will enable the creation of a network infrastructure for tokenization. In the same way that the rules and standards for communication between computers, which became known as TCP/IP (Transmission Control Protocol / Internet Protocol), were fundamental to the expansion and popularization of the Internet, Blockchain will play this role in the Web3 universe, defining standards and rules so that everyone can interact with Tokens.

By now you might be wondering: “Why do I need to know this, since I’ve never cared about TCP/IP and how the internet works?” The reasons for this lie at the heart of how Web3 works, but before that, let’s better understand the innovations that the Ethereum network has implemented.

Ethereum

Ethereum is, at the time of writing, the biggest example of Blockchain on the market. Although the Bitcoin network and its Bitcoin token are the best known, it is on the Ethereum network, using its Ether token, that things are developing. This is largely due to the concept of Smart Contracts that the Ethereum network brought with it.

Smart Contracts

The Ethereum network came to light in 2015 with a new feature compared to the Bitcoin network, enabling us not only to transfer values ​​without intermediaries in the digital field, in a secure, direct and immutable way, but also to have the possibility of setting conditions for this transaction to occur. It is as if the transaction could only be recorded if certain parameters were met. This, my friends, is today known as Smart Contracts.

The first thing that catches your eye is the name. Smart contracts?!

The idea here was never to create intelligence, or to associate the name with artificial intelligence. It was simply a way, perhaps not so happy, of indicating that those contracts create conditions for the registration of the operation and that, consequently, we have the possibility of creating more complex (intelligent?) things than a simple token transfer operation.

The creation of this condition seems like a simple change, and it is, but it changed the environment a lot. From that moment on, we were able to express a huge number of use cases on the Ethereum network, such as DVP (Deliver versus Payment) in the exchange between two tokens, governance models, conditions for issuing non-fungible tokens, among countless other use cases.

To give an example that I use – and that has already become popular – when we sell a used car we always have a discussion about what happens first, sending the money or signing the transfer on the DUT. PIX has helped a lot with this, but even so, transactions are not automatic and conditional. In the Ethereum Blockchain, this can be easily done if we have a token representing the money and another representing the DUT, and the transaction occurs with the transfer of both tokens automatically or not at all.

I see Smart Contracts as a conditional mechanism that determines whether or not we move forward with certain operations. Technical experts may argue that they offer much more sophisticated and complex solutions. I agree! However, by viewing Smart Contracts as a conditional mechanism, we already cover a wide range of applications and simplify our perspective in the face of this whirlwind of innovations.

In addition to Smart Contracts, the Ethereum network also brought with it the EVM.

Ethereum Virtual Machine (EVM)

Imagine a machine capable of processing, validating, and executing complex operations on a global network. Now, think of this machine not as a physical object, but as a set of rules and codes that govern a digital universe. This is the EVM (Ethereum Virtual Machine), the heart of the Ethereum network.

The EVM is the brain behind Ethereum, allowing developers from all over the world to build and deploy decentralized applications, known as dApps. It acts as a super-calculator, processing and authenticating every transaction on the Ethereum network. But instead of just dealing with numbers and simple calculations, the EVM operates with complex codes and smart contracts, ensuring that every transaction is carried out in a fair and transparent manner.

In more technical terms, EVM is the execution environment at the core of Ethereum. It works as a near “Turing complete” machine, meaning it can solve any algorithmic problem, as long as it is given enough time and memory. The EVM enables the development and execution of smart contracts and self-executing scripts that are written in the Solidity programming language and then compiled to Ethereum bytecode to be executed by the EVM.

All operations that occur on Ethereum, from simple Ether transfers to the execution of complex code in dApps, are processed by the EVM. For each operation, there is a fixed cost, measured in “gas,” which ensures that the network’s resources are used efficiently and prevents malicious or poorly designed code from overloading the network.

The term “gas” refers to the unit of measurement for the amount of computational effort required to perform operations, such as making transactions or executing smart contracts. Think of gas as the fuel that powers the Ethereum network machinery. Each operation has a specific gas cost, determined by the complexity of the operation. Users pay for the amount of gas used in their transactions using Ether, the native currency of the Ethereum network. This system ensures that the network operates efficiently by incentivizing users to optimize their operations and penalizing resource-intensive activities. In short, gas is an essential mechanism that maintains the integrity and efficiency of the Ethereum network.

Coming back to the EVM, it is completely isolated, meaning that the code running on it has no access to the network, file system, or other processes. This ensures the security and integrity of dApps and Smart Contracts.

Each node on the Ethereum network runs its own implementation of the EVM, ensuring decentralization and redundancy across the network.

This means that when a contract is executed, it is replicated on every node in the network, ensuring its immutability and censorship resistance.

The EVM is a fundamental component of the Ethereum ecosystem, enabling the creation and execution of decentralized applications in a secure and efficient manner.

What is being discussed a lot today is the development of Blockchains that are compatible with EVM standards, EVM Compatibles, or compatible with EVM. The advantages of being compatible with EVM are the ease of migrating code from one network to another, interoperability and, more recently, taking advantage of the huge community around the Ethereum network.

When it comes to currency and financial solutions, being EVM-compatible makes it easier to “import” everything that is being developed in DeFi, which we will see later. This, among other factors, means that several of the current Blockchains and many DLTs are following this standard. The Drex pilot, for example, will be run on Hyperledger Besu, an EVM-compatible network.