Blockchain and smart contracts are the most commonly used terms in the world of cryptocurrencies. However, what is the technology behind both is not something everyone knows. If you are wondering how blockchain and smart contracts work, this post is for you.
Technology behind Blockchain
Blockchain itself is a technology used by many cryptocurrencies such as Bitcoin and Ethereum. However, it has a unique and secure way to record and transfer your information with a broad range of applications other than cryptocurrency as well.
Think of blockchain as a form of a distributed ledger. This distributed ledger technology (DLT) can keep records across multiple computers, also known as "nodes." Now any blockchain user can become a node; however, it will take a lot of the computer's power to operate.
The nodes can store, approve and verify data within the ledger. This approach is different from the conventional record-keeping method that stores data in a central location like a computer server.
Blockchain can be public and private ledgers. The former allows the user to become a node as far as the user has required computer power, whereas the latter is when the owner of the ledger can limit who can add or make changes to the blockchain.
The technology behind Smart Contracts
A smart contract is a tool that automatically executes a transaction if it meets certain conditions without requiring any help from an intermediary entity or company. Smart contracts often work in association with Ethereum.
It does not have to be a big financial transaction; a smart contract can be about something as simple as sharing your cat's photo with a friend on social media. A smart contract can automate this task without a need for any centralized entity to approve or manage this transaction.
The smart contract uses blockchain technology, a computer network that works together and enforces network rules without requiring any help from an external entity or intermediary company. Smart contracts fortify agreements between two parties in code. This way, the rules can automatically enforce without a need of any court, approver, verifier, or third party.
Why Ethereum Only?
Ethereum is the second-largest crypto coin in the world by its market cap. It first appeared in 2013 and continues to be one of the most popular cryptocurrency platforms, and that is why smart contracts are exclusively used on Ethereum in most cases.
Some are skeptical about smart contracts becoming mainstream mediums to carry out transactions. However, some Ethereum aficionados believe it will eventually be the only way for the execution of secure online transactions in the future.
Hundred of apps use smart contracts these days, such as MakerDAO smart contracts for lending business and allowing their lenders to earn interest on their investments.
Many companies from various sectors and industries are already showing interest in blockchain and smart contracts. However, it is still a bit too early for smart contracts to become a mainstream means of transaction of big transactions. This is because the experts have to ensure that there are no exploitable loopholes in the technology.
However, blockchain and smart contracts users do not need to trust intermediaries and simply rely on the automation of technology for secure investment and transactions. While many bugs have been found in the tech, there are hopes that this problem will become rarer as the technology matures.
Interested in learning more about how smart contracts can reshape your business practices, or in launching your own NFT project? Reach out to our team for expert guidance and assistance.