Top Crypto Terms Deep Dive: Smart Contracts

A common misconception about blockchain is that all blockchains are related to Bitcoin. As we covered before into our deep dive into blockchain, Bitcoin was the first blockchain but it is no longer the only blockchain. One of these other blockchains is Ethereum – a name you no doubt have heard mentioned before.

Ethereum and the spread of smart contracts

Ethereum is often recognized for pulling blockchain beyond the realm of cryptocurrency and into a more mainstream market. Instead of dealing exclusively in cryptocurrencies (although Ethereum does have one, called ether), Ethereum runs code to complete computational processes. Ethereum can be thought of as Turing-complete virtual machine that runs as an engine for applications.

Ethereum established the basis for a lot of blockchain technologies and blockchain-based apps (also known as dApps) by introducing a key technology into the blockchain community:  advanced smart contracts.

A smart contract is, at its most basic, a piece of code that runs on top of a blockchain. Basically, the smart contact layer sits on top of the blockchain layer and uses the blockchain to trigger transactions when certain pre-defined conditions are met. Though not to be confused with legal contracts, smart contracts have similar properties to contractual agreements.

Real world examples

Imagine that you’re looking to buy a ticket to a concert from a third-party seller, and you live a few hours away from the event venue. Before driving all that way for the concert, you’d probably want to make sure this transaction will actually happen.  If that sale was taking place over a blockchain, a smart contract could be set up to ensure that the seller only receives money when you receive your ticket. Once the seller hands you the ticket and you both verify the transaction took place, the smart contract would tell the blockchain to push through the record of the transaction.

Smart contracts and the unchangeable, trustless properties of blockchain technology is a near perfect marriage.

Smart contracts aren’t just used for financial transaction, either. They can be used – and have already been used – for registering ownership or property rights, managing access to the sharing economy, voting in elections, or even as a basis for governing a public blockchain.

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