Glossary
From Ethereum and on
Before Ethereum, most blockchains had a single purpose. This purpose was limited to storing transactions for a single coin, such as Bitcoin or Litecoin. In a second moment, some blockchains even allowed the creation of new sets of coins, but their purpose was always limited and well-defined by the protocol. If someone wanted to use a blockchain for some other purpose, they should create their own network.
Since Ethereum, it became possible to use blockchains not only to create cryptocurrencies, but to execute any business logic. All this in a decentralized, tamper-proof environment. In blockchains like Ethereum and Neo, to create your own business logic, you only need to write a program, which is called a smart contract, to be executed by a virtual machine on the blockchain itself.
The idea of smart contracts led to a revolution in the blockchain environment, especially in the field of decentralized finance and tokenization. Currently, by using smart contracts, anyone can tokenize an asset and create a public token offering, also called an initial coin offering. This market saw an explosion of offerings in 2017, when many projects popped up, some of them were malicious, others were revolutionary.
With the possibility of implementing their own business logic, from small developers to medium-sized companies started issuing their own tokens, which are nothing more than variables in a smart contract. Thus, such initiatives managed to raise money for a new project, often using only a letter of intent, known as a whitepaper. Even with just a promise of a great idea, many initiatives like this one have been successful in raising money, with the promise of being the new Bitcoin and making their investors millionaires.
But despite its success, Ethereum has inherent limitations to its structure. It is capable of executing only 15 transactions per second, which is little for a network that is intended to be a world computer. This is due to several factors, such as the block size limit, the time to generate blocks and, most importantly, because of its consensus mechanism.
Initially, Ethereum’s consensus mechanism was based on proof of work, similar to Bitcoin. On September 15, 2022, a major event known as The Marge took place, when Ethereum switched to a new consensus mechanism, called proof-of-stake. Such mechanism is much more ecologically friendly and secure, but it still does not solve the problem of network scalability. Even now, Ethereum is only capable of executing 15 transactions per second on average, and the cost per transaction makes it unfeasible for large-scale use.
Neo is a blockchain that also allows the execution of smart contracts, but uses a consensus mechanism called the delegated Byzantine Fault Tolerance (dBFT). It allows it to achieve high transaction speeds while maintaining decentralization, with the ability to process up to 10,000 transactions per second. That makes it a more scalable option when compared to Ethereum, even though it is less decentralized. In the blockchain ecosystem, it is common for a protocol to have to choose between greater scalability or greater decentralization.
