The cryptocurrency market offers users thousands of different digital assets according to their needs. When the first crypto, Bitcoin (BTC) appeared in 2009 after the publication of the BTC whitepaper, it introduced cryptocurrency as a form of decentralized, digital cash. Since then, the crypto world has evolved considerably, with one of the main evolutionary steps for digital currency in general being the Ethereum (ETH) ecosystem, launched in 2015 by crypto enthusiast Vitalik Buterin and his developer team.
The reason why Ethereum marked a turning point in cryptocurrency history is because it introduced smart contract functionalities. Smart contracts are a cryptographic solution that enables programmers and developer teams to create, maintain, and upgrade online services, decentralized apps, and numerous other financial, technological, and entertaining platforms.
Let’s take a look at how the Ethereum blockchain works, why it’s different from BTC, its main characteristics, and what exactly smart contracts are.
Differences Between the Bitcoin and Ethereum Blockchain
The BTC blockchain was the first blockchain cryptocurrency network in the world and it paved the way for all future altcoins which heavily relied on the technological solutions presented by BTC in 2009.
The thing with Bitcoin is that it was created mainly as a form of digital cash that would enable much faster and more practical financial transactions between people and companies around the world, circumventing the modern fiat money economic system. Blockchain technology quickly gained widespread trust among the tech community and started spreading its popularity through different social groups from startups and crypto enthusiasts, all the way to brokers and investors.
A decentralized, distributed ledger of transactions, in the form of a linear chain of 1MB data blocks with a proof-of-work algorithm that makes sure no transaction is a scam, is something that really brought groundbreaking innovations to the way people transferred funds. Every transaction requires the sender to use a legitimate private key that proves their ownership over certain funds and every receiver needs to provide a public key that acts as the recipient’s address. This system enabled lightning-fast transactions between parties in just five-to-ten minutes, which is drastically faster than classic bank transfers that may take days and sometimes even more than a week when there are several intermediaries.
The Ethereum blockchain took all of these great aspects of the Bitcoin blockchain and added extra functionalities. For starters, the block size isn’t limited to 1MB with ETH and transactions are processed in less than a minute. But the real benefit of the Ethereum network is smart contracts.
While BTC is mainly a type of digital cash and store of value, Ethereum transactions can also facilitate highly advanced agreements between parties, called smart contracts.
The Ethereum Blockchain
Ethereum offers far more functionalities to users than just a cryptocurrency for transferring funds and storing value. Smart contracts, decentralized apps, and decentralized finance are some of the main advantages of ETH over cryptos that offer just a means of exchanging funds.
The concept of smart contracts is far older than Ethereum. It was first developed by Nick Szabo, a cryptographer and computer scientist, back in 1994 as a self-executing type of contract, which is basically a freely defined agreement between two parties without the participation of any central authority or other intermediaries.
These smart contracts aren’t written in words but rather directly in lines of code and the code of the contracts is built into the blockchain network. The whole execution process of a smart contract is based on advanced cryptography controlled by computer code. Once a contract is put into motion, it can’t be reversed or interrupted.
Ethereum integrated smart contracts as a key functionality, enabling transactions not only to carry funds through the ETH blockchain but also these smart agreements.
Decentralized Applications (DApps)
Decentralized Applications (DApps) are a direct result of smart contract functionalities. Usually, developers and programmers need to rely on large, centralized software systems such as Microsoft or Google in order to develop their own sites and apps based on the centralized technology of these corporations.
The Ethereum blockchain and smart contracts have enabled developers to utilize user-friendly ETH programming languages, such as Solidity, and develop fully decentralized, independent blockchain platforms and apps which aren’t tied to any central authority. DApps are a democratic alternative to mainstream, big data corporations and apart from independent use and flexibility, they offer a high degree of user privacy.
Decentralized applications can be used to build web platforms and online utilities in nearly any industry and facilitate advanced technological solutions through the ETH blockchain. The fact that transfers on the Ethereum blockchain take less than a minute, emphasizes the potential this technology has when it’s used for, let’s say, a decentralized exchange platform like Uniswap, making it far faster than a centralized crypto exchange.
Decentralized Finance (DeFi)
Decentralized Finance (DeFi) is another key innovation enabled by the Ethereum network and smart contracts. Basically, DeFi refers to the ability to completely go around the modern financial system and central banks when using ETH.
Transfers are far faster and it is possible for interested parties to conduct smart contracts that automate regular payment processes or supply chain tasks, allowing financial deals to go smoothly and without the need for extensive paperwork and bureaucracy.
How Smart Contracts Work
We mentioned that smart contracts are self-executing computer programs. Let’s take a look at the key aspects of smart contracts that make them a highly valuable tool for developer teams and individuals that value reliable software solutions for conducting business.
Smart contracts are fully automated and run by the programming code of the agreements. There is no need for you to check on the execution of the smart contract or do anything manually. This way, startups and companies can automate important aspects of their businesses, such as paying out of salaries to their employees or paying the monthly bills and other expenses.
Nothing can interrupt a smart contract. Once a smart contract is created by two parties and the code is written, the rest is up to the ETH blockchain which automatically facilitates the execution of the contract. No third party can interrupt the execution and the contract can’t be reversed. This is why smart contracts are very reliable: their immutability ensures that you won’t have to worry about anything interrupting them.
Security is one of the things that makes smart contracts truly amazing because they use top-notch encryption and run on the ETH blockchain which doesn’t allow any additional change of data once a smart contract is set in motion.
Also, smart contracts are a trustless method of doing business, because they don’t require any trust between two parties since the smart contract algorithm makes sure that no one can be cheated once the contract is agreed upon and written in programming code.
With traditional contracts between two parties, time is a serious issue because making a contract requires the involvement of legal entities such as lawyers and government institutions or banks. Smart contracts erase the need for implicating any third-party authority or middleman.
Every parameter and detail of a smart contract is defined by the two implicated parties and once it is put into motion, the contract starts working right away, with absolutely no delay.
Smart Contract Use Cases
Now that we’ve introduced the basics of what smart contracts are and how they work, let’s take a look at some of the most popular real-world use cases for these types of contracts.
Facilitating Cross-Border Payments
The use of smart contracts in trade and finance to facilitate cross-border payments quickly is a great advantage compared to classic bank transfers. One of the main concerns with cross-border payments that involve large sums of money is the security of these transactions.
With smart contracts, such payments are not only safe because they use the ETH blockchain, but they are also nearly instantaneous and the best thing is that companies and individuals can automate such payments. This is a prime example of decentralized finance with the help of smart contracts.
Loaning and Mortgaging
Loans and mortgages are among the most common financial operations between individuals and companies on one side, and banks or other companies on the other side. These processes are very complex and errors are common on both sides.
Smart contracts can improve such services and agreements by providing parties with secure and reliable technology that follows a built-in code, making it impossible to create an error once the contract is programmed appropriately. All those human errors or cases of intransparent behavior can be avoided by conducting loans and mortgages with the help of smart contracts. A smart contract can, for example, easily manage a loaning process and track payment schedules and notify implicated parties in order to efficiently handle the whole process.
Making Clinical Trials More Efficient
Innovative healthcare technology relies heavily on clinical trials. However, these trials are very complex to conduct, especially when large numbers of people are involved and they require a lot of cross-referencing of data between various institutions along with the systematization of results and information.
This is a perfect real-world use case for smart contracts since they can save valuable time and, thanks to automation, they can handle enormous amounts of data in an efficient and secure manner. Also, privacy can be an issue with clinical trials and this is where smart contracts also excel, since they can efficiently protect all sensitive, personal data, without risking any leaks that can happen when cross-referencing data between different institutions.
Safe Storage of Records
Any type of data can be safely recorded and stored using smart contracts. Large databases of artwork, digitized books, public records, documents, or complex blueprints and technological schematics can all be classified and stored safely using smart contracts. Special decentralized applications can easily be developed using smart contracts with the sole aim of keeping data records and these apps can be both private or public. The best thing is that the storage and processing of data can be fully automated and doesn’t require any monitoring.
The management of large supply chains is a prime example of smart contract use where blockchain technology enables the efficient control of the process, from producer to end customer.
Tracking the inventory of products available for sale in all the retail stores a company is selling their products in can be a very complex tax and sending adequate amounts of new products is also challenging. This is where blockchain technology and smart contracts jump in because companies can monitor and set these business processes to automatically alert the supplier when and how much additional products need to be delivered.
When the whole supply chain is interlinked through smart contracts, each point of the chain can be alerted in real-time to avoid any shortage of products in the stores, and also to produce sufficient amounts of new products without the risk of overproduction and waste of resources.
Insurance is another typical financial service that can involve lots of disputes between involved parties because of different interpretations of contracts and agreements. This is where smart contracts can be used to avoid lots of unnecessary disputes and make things clear and transparent for all involved parties.
Smart contracts can be used to automatically pull all needed data for an insurance contract and in case an insurance policy has to be paid out by the insurance company to its client, smart contracts gather all necessary reports and information needed to clearly assess the situation.
A Few Words Before You Go…
The concept of smart contracts existed before Ethereum but it wasn’t until the launch of the ETH blockchain that these types of contracts gained widespread popularity and acceptance for the numerous utilities and real world use cases they can provide.
Blockchain technology is still very young but it is already providing individuals, companies, and whole industries with numerous ways of improving their business and contributing to the community. These were some of the basics of how smart contracts work and how they can be implemented in different sectors.