Learn about blockchain

What is blockchain?

Blockchain is a database technology that relies on a ledger. Technically speaking, blockchains fall under the broader category of Distributed Ledger Technology (DLT), characterized as a network of computers distributed across locations, ideally operating in a decentralized manner.

In traditional setups, databases are centrally located and managed by a singular entity, such as a computer, server, organization, or institution. Contrastingly, a blockchain database is decentralized and spread out over a peer-to-peer network. Here, data is not stored in a central location but across the entire network, with each participating computer (or node) holding a copy of the same data. This decentralization means the blockchain lacks a single point of failure, enhancing its resistance to attacks and corruption.

Within a blockchain, network participants can verify transactions before those are permanently recorded on the database. The process of reaching an agreement on transaction validity varies, but it ensures that all data recorded is consensus-approved.

Blockchain organizes data into small units known as blocks, which are limited in storage capacity. As a block fills up, a new one is formed and linked to the previous, creating a chain. This chain is continuously visible to all network participants, making unauthorized data alterations easily detectable. Altering data on a blockchain would require changing the entire chain, a feat made highly visible to all.

Additionally, the data on a blockchain is protected with several cryptographic measures, making unauthorized changes difficult. This blend of cryptographic security and transparent chain linkage is what makes blockchain data reliable, secure, immutable, and virtually impossible to counterfeit.

The concept of blockchain is often nebulous and even subject to debate. Many prefer using “blockchain technology” to emphasize its technical foundation involving computer systems. Frequently, the term blockchain is invoked more for its associated ideologies than for its specific technological details, leading to ambiguity in identifying what precisely constitutes a blockchain-based application. Despite the lack of a precise definition, blockchains often share similarities with Bitcoin, which is widely regarded as their prototypical form, either by replicating its technical features or aspiring to comparable objectives. 

What is a crypto-asset?

Crypto assets, also known as digital or virtual assets, are digital representations of value or rights, safeguarded by cryptography. They cover a broad spectrum of electronically storable and transferable entities, complete with associated ownership or usage rights. This category spans a wide range of digital currencies, tokens, and coins, including but not limited to Bitcoin, Ether, non-fungible tokens (NFTs), utility tokens, asset-backed tokens, and digital money tokens, among others. The foundation of crypto-assets lies in cryptographic technology and distributed ledger technologies (DLT) or similar innovations. These assets are recorded on a blockchain, facilitating secure online transactions without necessitating intermediary services. Their connection to DLT ensures a high level of security against counterfeiting or duplication, with their value and ownership transparently and securely logged on a blockchain.

What is Web3?

Web3 is a catch-all term for technologies and projects that aim to make the internet decentralised, trustless and permissionless by utilising blockchain technology. The term was first coined by Ethereum co-founder Gavin Wood in 2014 and to truly understand the concept of Web3 one needs to understand the previous 2 generations of the internet, Web1 and Web2.

Web1 or the ‘read-only web’ is the first generation of the internet where the users had very little to no interactions between them and only companies who owned websites could add content.

Web2 is the evolution of a ‘read-only web’ that came about with the emergence of social media platforms which allowed users to interact with each other and post content, but they do not own the posted content. Its primary source of revenue is advertisement monetisation over which the actual users have very little control or benefit from. 

Web3 therefore, is the solution to the “ownership of content” and it removes or severely limits the influence of the intermediary. Web3 is closely linked to the use of cryptocurrencies and crypto assets such as NFTs.

Web3 is also seen as a driving force behind the new decentralised digital economy with its main features being (see the EU Commission’s take on Web3): 

  • Distributed ledger/blockchain to achieve decentralisation;
  • Cryptography to achieve self-sovereignty;
  • Smart contracts to achieve transparent rules, and
  • Common APIs to achieve interoperability.

As such, Web3 represents the transition to an internet of value, underpinned by the principles of decentralisation, trustlessness, and permissionless access, thanks to blockchain technology. It introduces the concept of tokenization—transforming assets, services, and rights into digital tokens on a secure, transparent blockchain. This era empowers users to truly own, share, and trade digital assets globally with just an internet connection.

As the above evolution of the Internet suggests, one can already entertain the concept of Web 4.0. While not extensively defined, Web4.0 points towards an even more advanced internet phase. It envisions an internet where intelligent systems and AI seamlessly integrate into the decentralized framework established by Web3, potentially enhancing user interaction, automation, and smart contract functionality to unprecedented levels. The EU’s recent exploration and Strategy of Web 4.0 suggests a future where the internet becomes even more interconnected, autonomous, and user-empowering, continuing the evolution towards a fully decentralized and user-centric digital landscape.

Find EUCI feedback to the EU Commission’s Call for Evidence on the Web 4.0 or the Virtual worlds (metaverses) – a vision for openness, safety and respect here.

Everything you need to know about Crypto Wallets

Crypto wallets, in short, allow users to buy, sell and hold crypto assets such as cryptocurrencies and NFTs and often serve as the basic interface between a user and the crypto world. Crypto assets are not “stored” in the crypto wallets, they are stored on the blockchain and crypto wallets hold the user’s private keys which are required to access the assets stored on the blockchain.

There are different types of crypto wallets.

  • Custodial wallets are wallets that are managed by a third party, while non-custodial wallets are wallets over which users have full control.
  • We also differentiate between the so-called hot and cold wallets. Hot wallets are wallets that “live” on the internet and are accessible through applications or browser extensions, while cold wallets are physical storage devices that keep the crypto assets disconnected from the internet and require a computer connection when buying/selling crypto assets).
  • Another type of wallet is a paper wallet, which is a piece of paper with private keys printed on them. The printout removes the keys from the internet and is therefore safe from cyber-attacks since the wallet is only accessible through the printed private key. 

What is DeFi?

DeFi (Decentralised Finance) is an umbrella term that encompasses a wide range of financial services delivered through public blockchains, most often Ethereum. DeFi services do not differ that much from traditional finance (TradFi) services and include lending, borrowing, insurance, trading in derivatives and trading in assets. Where DeFi and TradFi differ, however, is how the services are delivered TradFi is conducted via intermediaries such as banks and financial institutions while DeFi services are mostly conducted without an intermediary and rely instead on algorithms and smart contracts to facilitate trading on specialised decentralised exchanges (DEX). Some of the advantages of DeFi include openness, speed, flexibility, transparency and pseudonymity while potential drawbacks include the existence of potential exploits in the DeFi protocols and lack of standardisation.

While crypto asset regulation is gaining momentum worldwide, DeFi has yet to be systematically addressed by the regulators. So far, only a few regulators have published documents regarding DeFi, most notably the International Organisation of Securities Commissions (IOSCO) and the French regulators AMF and ACPR. See our regulatory responses to their DeFi Discussion Papers here.

What are Non-Fungible Tokens (the NFTs)?

Non-fungible tokens or NFTs are special crypto assets where each token is unique as opposed to fungible tokens like bitcoin (all bitcoins are identical and interchangeable). They can be used to reference almost any kind of asset that can be represented in a digital form. Therefore, NFTs have a wide range of use cases, most notably in creative sectors (art, music and culture), digital identity protection, gaming, Intellectual property protection, the Internet of Things, and many more. NFTs are unique as opposed to other virtual representations of information (for example, .mp3 files) because they are stored on a public blockchain (such as Solana, Ethereum, and others). Therefore, anyone can track them and find information about when they are created, where they are stored, etc.

For further information on how NFTs are (not) regulated in the EU, see EUCI’s article on this subject here.

New in: ReFi & DeSCI

Regenerative Finance (ReFi) and Decentralised Science (DeSci) are prominent fields of utilisation of blockchain technology, which are focused on providing solutions to a wide range of social and environmental problems. ReFi is primarily an environment-focused field of blockchain technology application, which encompasses innovations such as green bonds and green investments while encouraging sustainability, transparency, social responsibility and long-term thinking.