An introduction to DLT concepts and why I think IOTAs Tangle is superior to Blockchains
Disclaimer: Nothing in this article should be considered as investment advice.
The goal of this article is to help newcomers in the cryptocurrency space or anyone unfamiliar with the technology behind it to understand what Distributed Ledger Technologies (DLTs) are and why we need them. Therefore, I will try not to go too deep into the technical details of DLTs, but rather give an overview of the principles used. I know this is a long article, but I wanted to explain everything in one document so you don’t have to look in different places if you want to get a basic understanding. Feel free to skip parts you already know. It’s important to note, that I won’t discuss all possible attack vectors or every detail of the tech. This article should only be an introduction to the topic and the first stepping stone to dig deeper if it sparks your interest.
I’m going to talk mostly about cryptocurrencies because this is an easy example to understand, but there are a lot of other exciting use cases for DLTs (maybe I’ll talk more about them in a future blog post).
The Blockchain and Tangle sections have a short TLDR paragraph in the beginning explaining what they are. If you read the whole article, you can skip these TLDR sections as everything will be explained in more detail afterwards. If you have questions about this blog post, feel free to ask in the comments. So let’s dive into the topic.
To understand why cryptocurrencies were created in the first place, let’s take a quick look at how currencies have evolved in the past and how the current system works.
What is Money and why do we use it?
Before the concept of money was created, people already exchanged goods by bartering. In the right circumstances, bartering can be very simple and effective. Lets say Alice wants to trade some apples for a pair of shoes. If she can find someone that wants to trade shoes for apples, this system works perfectly. A challenge arises when Alice wants shoes from Bob, but Bob doesn’t like apples and asks for some bread instead. In this case, Alice must first find someone who wants to trade bread for apples, and then exchange that bread for shoes. This can get very complex and requires a lot of coordination between different people. So bartering can be simple and direct, but getting what you want in exchange for what you have may require coordination between more than just you and the person who has what you want.
A solution to this problem is a common medium of exchange that allows everyone to trade directly with each other. Money is this common medium of exchange. Early forms of money possessed value regardless of their currency status (currency is money in circulation), such as bushels of barley. This ensured confidence in the currency, as anyone could make use of it and it was therefore unlikely to lose value. Another advantage with bushels of barley is that bushels of the same size are not easily distinguished from each other and therefore have the same value. However, this form of money also had some obvious disadvantages, as the bushels were inconvenient to carry around and also degraded if not used or quickly traded away.
To solve these drawbacks, new money in the form of precious metals, especially gold, evolved. This new form of money was very convenient to carry around (at least the amount required for daily use) and did not deteriorate over time. Compared to bushels of barley, however, it required much more trust, because gold had less underlying value, apart from its use as currency or jewelry. Since it was impractical to divide gold into very small amounts for purchases like a loaf of bread, banks emerged that offered to store the gold for you in exchange for promissory notes. These promissory notes now could be used to make purchases or taken to the bank to be exchanged back into gold. This was the birth of paper money.
Since the abolition of the gold standard, currencies today are no longer backed by anything physical, but by the promise of the states to keep the monetary system running. This centralized the power over the monetary system into the hands of the currency-issuing entities (the central banks). Therefore, everyone using these currencies must trust the central banks, because theoretically they could create as much money out of thin air as they want, thereby devaluing the savings of everyone who uses the currency. Another thing that changed is that nowadays most transactions are done online rather than in person.
