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Understanding the Basics of Ethereum and Smart Contracts

December 9, 2021

According to the website, Ethereum is a community-run technology that powers the cryptocurrency ether (ETH) as well as thousands of decentralized applications.

Blockchain is a system of decentralized nodes comprised of a network’s resources where transaction data is distributed and stored using a consensus algorithm. That means that all the parties under the blockchain network protocol must approve the ledger’s state to increase the trust of unknown peers in a decentralized environment. In contrast to Bitcoin, Ethereum is more than just a cryptocurrency as developers can use it to deploy smart contracts and decentralized applications, or dapps.

This article will discuss how Ethereum works, its disruptive technologies, and the smart contracts ecosystem.

Table of contents

Understanding Ethereum and smart contracts

Smart Contracts

Before understanding smart contracts, the following is what Ethereum consists of: In a nutshell, Ethereum uses the blockchain protocol to store the record of transactions. In a blockchain, information needs to be stored in chunks structured in blocks. The chain of blocks needs to be encrypted in digital cryptographic signatures to ensure security.

Therefore, each block in the network contains data and its hash. A hash needs to be unique and include a group of transactions that have been permanently committed to the database. Each new block introduced will need to be linked to the previous one. The network is peer-to-peer to eliminate any central authority. When we present a new block, the system will synchronize it with everyone in the network. Therefore, each node in the network validates the block before adding it to its Blockchain. If any of the blocks have been tampered with, other nodes in the network will reject to approve them.

Ether

In the Ethereum network, participants often need to execute operations. In such scenarios, a payment solution is required. The Ethereum network uses Ether as the cryptocurrency(i.e., transactional token). Using this form of payment does not need a third party to approve transactions.

Use of the Consensus mechanism

Consensus is the method that validates and records data on the Blockchain. In scenarios of cryptocurrencies, this is the mechanism that maintains transparency and security on the network. It is also responsible for issuing new tokens into circulation. Instead, a single entity controls nothing; every participating network can see, share, or track transactional data.

The Ethereum Virtual Machine (EVM)

In a nutshell, the Ethereum network provides access to the Ethereum Virtual Machine (EVM) – a decentralized blockchain computer where developers can build smart contracts and embed them into the application. It’s a virtual computer where all Ethereum contracts are executed.

Furthermore, the EVM is deterministic in that given an input of a smart contract running on an EVM, it will always produce the same output. The process is essential because the Blockchain will need to achieve its functionality by ensuring that all blocks agree on smart contract results and reach a consensus. Thus, the EVM provides a consistent way for smart contracts to execute without downtime, censorship, or influence from any third parties.

The smart contracts

Ethereum platform can run smart contracts. This agreement is programmed into code(i.e., controlled by its internal code). In a smart contract, the conditions of the contract are digitally enforced within the code. Therefore, it is a self-executing contract in a decentralized environment. The system first needs to store conditions that will execute, validate, and make terminations, ensuring that each participant has equal outcomes. An example is having two parties place a bet on a race. We can ensure each participant’s money is safe before automatically executing the contract conditions when met using smart contracts.

Common Blockchain and smart contracts use cases

With blockchain-driven contracts on the rise, some of the industries that can implement this technology will include:

Supply chain

Blockchain can drive the new era of Logistics and supply chain management. As businesses expand, the production and complexity of managing the isolated units are demanding. We can effectively implement blockchain capabilities in the supply chain administration in some ways. Blockchain slots in when a chain grows, and hence, many third-party agents get involved. The issues guarantee efficiency, transparency, and overall honesty. Since Blockchain is a distributed ledger, it becomes handy in the following ways.

  • Decentralizing the supply chain network ensures that there is no sole data owner. Using Blockchain technology can boast a trustworthy way to store data due to the decentralized nature of the distributed ledger. The result is equally allocated information, thus improving data transparency, frauds, and counterfeit transactions.

  • Allowing transparency of information where everyone can track everything. By incorporating Blockchain into a logistics network system, every network member now has access to any available piece of data. This brings us to the point where every transaction remains transparent and cannot be removed. This is the missing piece of transparency in most of the centralized supply chains systems these days.

  • Applying a universal solution in cost reduction: The blockchain technology architecture can scale in distributed ledger infrastructure. Therefore, we can create a shared network for order management from suppliers. Thus, the approval and validation of orders are automated.

Real estate

In the ministries of land and real estate, a lot of paperwork is involved. Blockchain can progress the industry by minimizing the paperwork and applying smart contracts to automate verification and validation of property ownership. In addition, the timestamping of records over the decentralized ledger can improve time-taking processes.

Banking

The modern financial system relies on centralized banks to hold the fiat currency to validate and perform transactions. However, the banking software system adds extra cost and hassles making it inefficient. We can build a faster-protected lending platform in an anonymous system using smart contracts and the rise of DeFi using smart contracts to complete traditional financial transactions without a governing body.

Health care

The health industry is booming. However, with the vast volume of medical data, the regulation still makes most of this information remain inaccessible from the outside. However, imposed restrictions make it hard for research of increasing complexity of diseases, data breaches, and innovation. However, Blockchain is a technology that can fix most of these issues when implemented. Below is why Blockchain is a great fit:

  • Involving several parties means that we need to improve trust by reducing the trustee middlemen to improve efficiency. Therefore, Blockchain can create the version of truth by building consensus while giving the end-users control of data.
  • To achieve transparency and integrity, the data needs to be decentralized and encrypted to avoid the ineffectiveness of central authority failures.

Healthcare

Conclusion

As a digital platform, Ethereum gives developers a platform to build a wide range of decentralized applications such as security systems, voting systems, payment methods, and more. Despite its significant benefits such as safety, confidentiality, the technology is relatively new to users and still faces limitations from government regulations. However, Blockchain can be the mover and shaker of the fourth industrial revolution.


Peer Review Contributions by: Odhiambo Paul