Overview of Blockchain (Part 2)

Smart Contracts

Currency was the first use case that was demonstrated on the blockchain however in 2014, Vitalik Buterin released the first version of the Ethereum network. This network has been created with the goal of creating a global operating system for trusted computing to extend the use of blockchain. It allows you to create programmable “smart contracts” that run on the global computer and are stored on the blockchain in a permanent, immutable way. Ethereum has now grown substantially and there are many global corporations that are members of the Enterprise Ethereum Alliance. Ethereum has a public blockchain but it also possible to create private Ethereum chains.

Smart contracts allow you to exchange money, property or anything of value in a transparent, conflict free way while avoiding using a middleman. The simplest way to think of them is like a digital vending machine.

Why are smart contracts so revolutionary?

Smart contracts have the capability to be digital representations of financial contracts that exist in many areas of the financial world, for example bonds that are paid quarterly to investors.

Intermediaries are present in many of the current transactions that can bring in an overhead cost, a delay to the process, counter-party risk or potential for fraud.

A smart contract deployed on a secure blockchain makes it impossible for one party or group of parties to reverse the transaction once recorded on the blockchain. This eliminates the need to authenticate and settle transactions and thus would guarantee the contract would be executed without an intermediary, this would allow transactions to be automated.

Key features of smart contracts:

• Automatically executes based on the programmed logic.
• Independent multi-signature approval of the execution of the contract.
• Escrow capability, i.e. locking of funds into the contract.
• The conditions for execution can take inputs, such as prices or other real-world data.
• Access can be granted to read records of all transactions

Decentralised Applications (DApps)

An analogy that has been made is that if Bitcoin was like the first mobile phones then Ethereum and other smart contract capable currencies are like the smart phone. Smart contracts allow the deployment of applications on top of the blockchain.

Decentralised applications or DApps are applications that run on the blockchain, without any central servers hosting the content. They consist of a front end that is much like current web development, the back end is what is published and permanently stored on the blockchain.

Tokens and coins

Cryptocurrency has emerged as a new asset class that can be bought and traded, there are some distinct types within the heading of “Cryptocurrency”:

Coins

These are the most basic type and allow value to be sent from one party to another, the leading example is Bitcoin.

Utility tokens

Utility tokens are used to provide access to a service or product. They provide a method of payment for digital services, such as tokens used to pay for smart contracts or contributors to a blogging site. Ether is the token used to power the Ethereum network for example.

Tokenised securities

These are tokens that provide a share of a business or asset, this could be a commodity such as gold but can be any asset such as art or music.

Oracles

One issue that faces blockchain is getting data securely from external inputs. E.g. Interest rate data from a central bank or data from a ratings agency. Oracles seek to solve this by acting as the link between the blockchain and external sources, to be effective they themselves also need to demonstrate trust and there are currently limited ways this can be achieved. Most services that currently exist depend on an amount of centralisation or dependency on a third party.