Smart Contract Essentials
By: Elena Alehno
Tags: Smart Contracts

Who would have thought that past technology may be the wave of the future? An older data system called Blockchains is decisively coming into fashion as well as their companion program Smart contracts. It has been said Blockchains and Smart contracts are about to revolutionize how data is recorded and how transactions will be handled. How could proponents of Blockchains make such a bold claim? To understand that one must first know how it works and how each element improves business.

Blockchains are digital event trails that contain batches of data. These are created and recorded in chronological order by the system; without the need for a third party which makes Blockchains an ideal model of security. (Rosic Blockchain). As each block is added to a chain it is given a unique code name called a hash and is checked by each computer in its network, also called a node, connected to the Blockchain. (Fortney) A hash is a series of numbers and letters used to identify a piece of data called a block. As you might imagine the use of hashes only increases security in the chain. A block uses the hash before the block in addition to the new hash (Fortney). A unique hash is given for each block that is character-specific. Therefore, any attempted changes to it will give a wildly different hash (Fortney). The data becomes tamper-proof as the data and hash are essentially impossible to alter (Kotow).

Having a hash also helps protect the data by making it hard for people outside the network to identify what data they are looking at (Christensson). Transversely, hashes can also be used to easily verify data within the network, and if some data is downloaded an algorithm is used to produce the same hash to show the data was not modified (Kotow).

A further benefit to using Blockchains is that they are decentralized. This kind of system has many benefits over centralized networks. Normally there is a central server that each computer in a network is connected to. In a decentralized network, each computer or node in a Blockchain system belongs to that chain. All nodes update at the same time and there are no special abilities assigned to anyone computer (Fortney). This allows users to access and continue adding events uninterrupted. A decentralized network increases security against threats as there is no singular point of weakness. For example, a cyber-attack would have to affect hundreds of computers instead of one. Or, if a power outage were to occur in one area, it will not affect network users outside of that area. In addition to having the advantage of decentralization,

Blockchain data is kept secure and accurate with a series of algorithms. “Proof of Work” is one such algorithm that determines the most reliable chain by its length. This ensures that mistakes are minimized when searching for specific events. Another algorithm called the “Byzantine Fault Tolerance” has a head node and peer nodes that constantly communicate and verify messages sent by other nodes (coinbundle). Such algorithms don’t need to be executed by people so they have the added advantage of reducing the cost of staff normally needed to check data to ensure it is correct. It is because Blockchain data is so secure, that it can safely be made public. Public Blockchains allow anyone to join a network and see every transaction created as well as the details of each transaction on the chain (Rosic Blockchain). This allows people and companies to be held responsible for each of these new events.

Sharing information, such as who a supplier is, or where the money is being spent publicly, can help average consumers and investors make more informed decisions about where they would like to spend their hard-earned dollars. The average person can transfer money through the Blockchain for free (Rosic Blockchain). He or she can do this because many Blockchains have their own currency like Bitcoin. Cyber Currency is separate from banks and the government, this enables people to transfer money, and pay less in service fees. Fewer service fees mean that people that are underbanked have a way to transfer money affordably. The cyber-currency also gives people another option for banking and money transfer (Schebesta). A smart contract is a program that runs on top of a Blockchain. By running on the Blockchain, the Smart contract gets the same benefits as a Blockchain (BlockchainHub). The difference between the Smart contract and a Blockchain is that a Blockchain records data but a Smart contract uses data to enforce rules.

Smart contracts use an “if-then system”, for example, if there are no paper towels then more will be ordered. If one requirement is not fulfilled but the other is the contract can refund a payment automatically. These systems are faster and cheaper than getting a third party to perform these services. While they haven’t been approved for use legally, they are perfectly suited for daily purchases on the internet (Rosic Smart Contract). Smart contracts could easily displace money transfer companies due to their ease in securely sending money. Additionally, money can be sent for free! And, because they are used alongside Blockchain systems anyone can see the contract and what each person received. This technology can be used to protect people in the Resale market. Other people can see who owns a particular item and how the transaction took place.

If all conditions are not met then a party that fulfilled their part of the conditions can get money or items back automatically. Blockchains and Smart contracts will improve how business is done. They will speed up transaction times, keep those transactions secure in multiple ways, reduce errors, and ultimately reduce frustrations and costs. Every day the fan base for Blockchains and Smart contracts grows larger and larger. It is likely that in a few years (as people become more acquainted with this technology) it will spread to daily use by the global mainstream population.