Blockchain 1.0 vs. 2.0 vs. 3.0 - What's the Difference?

Salomon Kisters

May 16, 2022

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Blockchain is a disruptive technology that has been around for 40 years. In its initial design, it served as an elegant database system, but now we see this same platform being used in modern trade and industry with rapid adoption rates across the board:

The improvement of blockchain began when developers realized how valuable they could make their own databases through data ownership rights management (DRM) features like identity theft protection or content censorship resistance; these additions made them more than just secure document storage spaces.

As time went on, there were further refinements to increase transaction speeds while also ensuring information integrity by creating rulesets tailored specifically to each individual application.

Blockchain technology led to the creation of the Bitcoin network in 2008 by the anonymous group identified as Satoshi Nakamoto. Nakamoto’s blockchain version was a completely decentralized distributed ledger of financial transactions in Bitcoin (the world’s first cryptocurrency).

From that time onwards, blockchain tech has successively evolved over the last decade and a half and has revolutionized the way business processes are documented in the digital space. We now see blockchain playing a key role in different industries, including finance, supply chain, healthcare, and even digital entertainment.

In this article, we explain the evolution of blockchain over three generations to give you an idea of how far the technology has come. By understanding the transformation of blockchain over the years, one can know and appreciate how it can be applied in different industry use-cases.

The 3 Levels of Blockchain

Blockchain technology had three basic iterations over the years. To be clear, we will consider the first iteration as the version conceptualized and implemented by the Nakamoto group. Each successive blockchain version includes additional coding and structural features that allow users to perform a broader range of tasks.

• Blockchain 1.0: The Origin of the Modern Blockchain
• Blockchain 2.0: Smart Contracts
• Blockchain 3.0: Decentralized Enterprise Level Applications

Blockchain 1.0: The Origin of the Modern Blockchain

Blockchain 1.0 was the first application of the technology implemented by Nakamoto, as we mentioned above. This version is the simplest form of a decentralized ledger for recording transactions and storing the data across several computers. In simple terms, the information recorded in the earliest form of blockchains was limited to values of an ‘item’ that changed ownership over time. In most cases, the ‘item’ we are referring to was a digital currency.

This version of Bitcoin is essentially an electronic cash transfer system that is automated and functions without the need for human intervention between transactions as a trusted authority. This system allows users to exchange currencies without the intervention of a bank (either from the private or government sector). The system allowed end-users to transfer funds anonymously using wallets while giving access to the complete transactional ledger to everyone linked to the blockchain. It was effectively transparent.

The early technology also allowed miners (users who helped verify transactions by performing cryptographic tasks through their computers) to gain rewards through the Proof of Work mechanisms built into the protocols.

For these reasons, blockchain technology has become the backbone of cryptocurrency trading platforms. Bitcoin was the first of the cryptocurrencies to be launched in 2009 and would be followed by several others, such as Dogecoin. Because cryptocurrencies were not initially subjected to government regulations and a high level of financial scrutiny, they became an alternative to trading with fiat currencies like US Dollars.

Cryptocurrencies could also be traded for fiat currencies themselves. Many investors were already wary of the after-effects of the 2008 financial crisis, which also catalyzed the adoption of cryptocurrencies in different markets. The widespread adoption of digital currencies during this time led to the formation of cryptocurrency exchanges like Coinbase, Binance, and Kraken, which have become well-known brands in their own right.

The first iteration of blockchain was limited to online settlements through digital payments. It also had issues with scalability as overcrowded networks could result in longer processing times of transactions. Some simple improvements to the first iteration of blockchain included protocols that allowed faster transactions by increasing block sizes or decreasing block limit timers.

Examples of blockchain 1.0 implementations include cryptocurrencies such as Bitcoin, Dogecoin, Litecoin, and Monero. There are now hundreds of cryptocurrencies available today.

Blockchain 2.0: Smart Contracts

The next development in blockchain technology expanded on the capabilities of the blockchain protocols. Four years after the rise of Bitcoin, Vitalik Buterin introduced the concept of Ethereum, a technology based on blockchain with some notable improvements over the previous generation.

Ethereum was the first blockchain with the smart contract integrated into its protocol. In simple terms, smart contracts are a set of codes that are automated when certain conditions are met. These contracts enable two users or organizations to do more than just simple cryptocurrency transactions.

Ethereum, for example, is a technology with multiple components - a virtual machine with multiple layers of information, user accounts, contracts, and cost accounting (a metric known as ‘gas’).

Therefore, smart contracts allow two parties to automatically execute complex tasks while facilitating the exchange of digital currency. As a result, Blockchain 2.0 introduced several new opportunities that were not possible before due to the limited scope of the first-generation blockchains.

The entire decentralized finance (DeFi) infrastructure pretty much became practicable due to the launch of the smart contracts. It allowed programmers around the world to develop decentralized applications and software on the existing blockchain platforms.

Soon, the industry witnessed a surge in growth in decentralized autonomous organizations (DAOs), redeemable tokens for ICOs or governance controls, and identifiers for unique items such as NFTs (non-fungible tokens).

This new generation of blockchains still had its flaws. For example, smart contract code could include bugs and security vulnerabilities. The latter can have serious consequences as they leave the blockchain open to attacks by hackers. Moreover, due to the ever-increasing traffic on the Ethereum blockchain, the ecosystem suffered from delayed transactions and high gas fees.

Examples of Blockchain 2.0 technologies include cryptocurrency platforms (Ethereum, Lisk, and Neo), Defi applications (like MakerDAO, Uniswap), and browser extensions like MetaMask.

Blockchain 3.0: Decentralized Enterprise Level Applications

The next level of blockchain technology has a less clear definition.

However, the consensus among experts is that Blockchain 3.0 has a broader scope in terms of industries and sectors it can incorporate. This means that Blockchain 3.0 has applications in a broader set of industries outside the domain of finance and economics.

The major concerns for this generation of blockchains are sustainability, scalability, cost-effectiveness, more decentralization, and improved security.

Examples of these applications include healthcare (smart contracts for medical services and EMR storage), cybersecurity (multi-factor authentication), supply chain (smart delivery contracts), and manufacturing.

The technology can also use computer processing power to run computational projects like Folding@home and supercomputers.

These industries rely on enterprise-grade solutions for planning and executing relevant business processes. With Blockchain 3.0, enterprise-level databases can be seamlessly integrated into decentralized systems for secure and transparent documentation.

Additionally, the new technology allows for the interoperability of different blockchain networks around the world. Examples of this are COSMOS and Chainlink ecosystems that are based on the Inter-Blockchain Communication (IBC) protocol and allow data transfer between different blockchains without attacking their sovereignty.

Blockchain 3.0, therefore, requires innovative solutions to integrate different technologies. At the hardware level, these comprise IoT devices and Application Specific Integrated Circuits (ASICS) meant for processing, storing, and connecting blockchains.

At the software level, the technology is represented by multiple processing and storage layers but with a higher degree of complexity and optimizations than Blockchain 2.0.

For instance, Blockchain 3.0 uses DAG algorithms, which, when combined with new devices, dramatically increase the transaction processing rate and eliminate block times. As a result, newer blockchain platforms, such as Solana and Avalanche, can execute several thousand transactions every second, which is a lot higher than Bitcoin’s seven transactions per second and Ethereum’s (Classic) 15 transactions per second.

Another significant change that the third-generation blockchains, like Cardano, introduced is the popularization of the proof-of-stake (PoS) model. This new consensus mechanism eliminated the use of highly-complex computing devices and the enormous energy consumption required to create new blocks. This is why many of the recent blockchains are termed ‘green blockchains.’

Examples of Blockchain 3.0 technology include COSMOS, Tron, and Cardano.

What’s Next?

Many experts feel that Blockchain 3.0 is the final evolution of blockchain technology. At the same time, we are witnessing unprecedented leaps in Artificial Intelligence (AI) and chip manufacturing.

AI, in particular, is playing a huge role in discovering new computational techniques that are astounding even to the most seasoned researchers and developers. As new technologies continue to trickle down into business and mainstream consumer applications, who knows what the future holds for blockchain technology.

From the journey of blockchain technology and the various applications it helped develop, we can see that it has become, albeit gradually, an integral part of the enterprise software stack in today’s business organizations.

If you are looking to streamline and scale your business processes, blockchain can help you improve data exchange, drive operational agility, and open new revenue streams.

To adapt to an ever-changing new normal, you need a partner with expertise for smarter enterprises. Consider OriginStamp to safely and securely timestamp your business processes.

We provide a trusted internet-based solution that helps you secure timestamped documentation, develop a fool-proof audit trail, and integrate blockchain technology into your day-to-day business operations.

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