What is Blockchain and Smart Contracts? Brief introduction
By: Lukas K
Tags: Ethereum, Cryptocurrency, Bitcoin, Blockchain, Smart Contracts

All this hype has been rising exponentially, however, most of the people know nothing about how blockchain technology works, what is a smart contract and how it could be used. For this very reason, I decided to give a gentle introduction to blockchain technology.

Blockchain. What is it and how does it work?

Blockchain is a decentralized distributed ledger.

Speaking in a human language — it is a network of computers having an identical copy of the database and changing its state (records) by a common agreement based on pure mathematics.

It means, that there is no need for any central server or agent to trust to. The blockchain is the technological base for all those names like Bitcoin, Ethereum, Hyperledger.

Bitcoin vs Ethereum

Let’s compare two most popular blockchain networks. Bitcoin has been dominant in the cryptocurrency field for a long time and is not planning to stop.

It was launched with the intention to bypass government regulations and create online payments without the need of intermediary to confirm transactions. Ethereum is another cryptocurrency project, however with much greater possibilities.

Ethereum introduced so-called smart contracts and a way to perform actions by the rules defined in the contract. Simply speaking Bitcoin is a platform for decentralised currency while Ethereum is a platform for decentralised currency and most important — engine for applications which can be run without a need of trusted third party (some central server).

I personally like the analogy of the Ethereum as a global computer to which anyone has access to.

Smart contract

Smart contract — is a piece of code which is stored in the blockchain network (on each participant database). It defines the conditions to which all parties using contract agrees. So if required conditions are met certain actions are executed.

As the smart contract is stored on every computer in the network, they all must execute it and get to the same result. This way users can be sure, that outcome is correct.

Sounds complicated? It’s not.

Let’s simplify everything using an example. As I am familiar with the logistics, I will take a use case from this industry. Let’s say you want to ship a pallet of goods to your friend Bob.

You trust Bob, but you don’t trust trucker Tom, who will carry your pallet. On the other hand, Tom does not trust you as well, maybe you won’t pay him?

Therefore, you have to sign an agreement with Tom that you will pay for the shipment in a few days after delivery. Usually third party is involved in this process, legal papers, contracts are scanned, printed, signed.

Can we simplify the process? Yes! We can do that with the help of smart contracts. We could define those rules in code.

You make a payment for shipment to smart contract on a day of loading. It holds payment till shipment delivery is confirmed by Bob. Then smart contract releases the payment and money is transferred to Tom automatically.

Let’s move a little bit forward. What if we would have a GPS tracker attached to the pallet? Then we simply could eliminate Bob from this process and just release the payment automatically, when the location rule is met.

Conclusion

It was just a short intro to the broad Blockchain and Smart Contracts topic. This technology opens a lot of possibilities for new decentralized businesses and removes the need of expensive third party.

Many new startups are working on this technology, and big enterprises are testing it in closed networks to collaborate with each other directly without the need to intermediary.

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If you want to learn how smart contracts are executed check: This is How Smart Contracts and Ethereum Work. Brief Introduction