At a very high level, the blockchain is a decentralized ledger, or list, of all transactions across a peer-to-peer network. This is the technology underlying Bitcoin and other cryptocurrencies that will soon be revolutionising a wide variety of business processes.
Blockchain technology is the underpinning of a radical rethinking of how we pay for things - as well as how we verify who owns what and who has the right to buy or sell it.
Using this technology, participants can transfer value across the Internet without the need for a central third party. The buyer and seller interact directly without needing verification by a trusted third-party intermediary.
Transactions are not anonymous, but are typically pseudonymous: a transaction record is created, but breakthroughs in the latest encryption methods ensure that the record cannot be falsified, while identifying information cannot be found by third parties without the relevant key.
Cryptocurrencies are the digital assets that get transferred between parties, where the resulting transaction is recorded on the blockchain.
"Cryptocurrency" is technically a misnomer that has led to much confusion over the classification of modern digital assets, which can be separated into three generic groups: (i) Coins, (ii) Alt Coins and (iii) Tokens.
Cryptocurrencies need to be stored in what are known as “wallets”, each of which has a specific address. When an asset is transferred from wallet A to wallet B, it will only arrive at its destination once the decentralised network has confirmed it. This requires a multitude of users, known as “nodes” to reach a consensus that the asset has in fact been sent from A to B.
As the network confirms these transactions, it encrypts and compresses the data into a “block” which has to match the specific criteria, protocol or algorithm of the blockchain in question. When all transactions in the block have been confirmed, it is added to the blockchain, and all the digital assets will arrive at their destination i.e. wallet B.
Smart contracts are pieces of self-executing code which can be programmed into particular blockchains known as a smart contract platform. In the same way that code can confirm an asset was transferred from A to B, it is also able to confirm that the asset will be transferred somewhere else once certain conditions are met.
The platform however, will have a variety of accessible applications (decentralised applications or DApps) that can create escrow procedures, regular automatic payments or format the blockchain’s proprietary coins into new cryptocurrencies.
The most well-known smart contract platform so far has been Ethereum, made up of the Ethereum Virtual Machine (EVM) and its proprietary coin, Ether. This open source software has its own programming language, Solidity, and has grown immensely throughout 2017, hosting well over 90% of all Initial Coin Offerings (ICOs) and Token Generation Events (TGEs).
An Initial Coin Offering (or ICO) occurs when a coin is first made available for sale. It will last several weeks, and usually consists of both a private pre-sale and a public crowdsale. The same is true of tokens, but while a coin is completely novel, a token is produced from an existing coin e.g. Ether, via a smart contract platform e.g. EVM. It is therefore technically not an offering and so is referred to as a Token Generation Event (or TGE).
The pre-sale is often carried out in several rounds, where different quantities of the new token are sold at a decreasing discount, so as to incentivise early adoption of the new cryptocurrency. This stage is often by invitation only, while crowdsales then enable any member of the public to purchase the new token, either from the company itself, or through third party exchanges on which the token is listed.