Bitcoin is the cryptocurrency that seems to make headlines, triggering accusations of a bubble as it reaches all time highs. In contract, Ethereum is the cryptocurrency that is steadily growing in the background.
Ethereum is smart contracts
Smart contracts are special decentralised applications created on the Ethereum blockchain by third party developers. Smart contracts can create markets, securities, debt instruments, legal documents, and contracts. The benefit is that there is no need for a middleman, be it a broker, market maker or a lawyer.
It is the blockchain technology that facilitates the smart contracts. Started in August 2014 by a Swiss non-profit, the network now facilitates hundreds of other cryptocurrencies by providing the infrastructure to launch.
How does Ethereum utilise blockchain technology?
In an ordinary transaction there is a need for an independent middleman, or even middlemen.
Let’s take an example such as the sale of a house. A contract dictates that on a certain date the buyer transfers the money to an independent account. A middleman verifies that the money has been received and ensures that the seller has signed the contract. Once the contract has been signed, the seller is notified that the money has arrived.
Without the middleman, the seller could receive the money but not sign the contract. Alternatively, the seller could take the money and run. Whilst doing a runner a little hard to do without vacating the property, however the principle is the same for any other type of asset.
Now let’s run this example again but on the blockchain. Let’s create a new smart contract. This contract contains a set of rules by which the property sale can occur.
The smart contract could state that the seller has to sign a contract by a particular date whilst the buyer releases funds at the same time. Once conditions are met then the smart contract can be executed such that the vendor receives the funds and the buyer the assets.
Why isn’t there a need for a middleman in the blockchain?
The system is self-sufficient and hence does not require a middleman. Remember that the decentralised nature of the blockchain means that everyone contributing to the Ethereum network is also policing it.
The blockchain’s distributed ledgers are updated for the new smart contract. In order to complete the execution of a smart contract the program needs confirmation from the rest of the network. Other miners provide this confirmation negating the need for a middleman.