Blockchain has led to serious consideration of how its decentralized technology can be applied in the finance sector and beyond. In this post we explore three important components of this discussion: smart contracts, Ethereum and Ether.
Smart contracts are computer programs or protocols that are intended to, among other things, electronically authorize, enforce, and perform commercial transactions and other contractual arrangements.
First conceptualized in 1996 by computer scientist Nick Szabo, a smart contract is, in Szabo’s words, “a set of promises specified in digital form, including protocols within which the parties perform on those promises.”
Smart contracts are written computer code that self-execute on the agreed contractual terms once specific conditions are achieved, enabling strangers to trade and do business without any centralized overseeing authority and without having to rely on a party to the contract fulfilling its contractual obligations after the fact.
Smart contracts are built into a blockchain, which records the historical data of the smart contract as it executes each term following the satisfaction of prior conditions. These conditions can either be internal or external to the contract.
A term in a smart contract that requires an external condition to be met uses a data feed called an oracle to link the contract to the world beyond the blockchain. Oracles can track external conditions like the temperature in Calgary or the current trading price of a cryptocurrency or fiat currency. The use of blockchain makes a smart contract trackable but also irreversible.
Ethereum and Ether
Ethereum is a distributed computing platform that was developed to take advantage of blockchain technology.
The concept of Ethereum was discussed in a white paper by computer programmer Vitalik Buterin in 2013, and Ethereum was operational as a platform by 2015. Ethereum’s platform runs programs, services and applications across a network of individual computers globally on the blockchain.
Ethereum’s creators envisioned the platform would operate as a world computer by eliminating the need for centralized servers.
The programs developed for Ethereum are coded as smart contracts and are written into the platform’s blockchain, and the applications that operate this way are called decentralized applications or DApps. The individuals who contribute the time and computer processing power to facilitate the operation of the decentralized applications on Ethereum are remunerated with Ether, similar to the remuneration of Bitcoin miners with Bitcoin.
Ethereum is fueled by Ether (currency code “ETH”), the value token of the platform.
Ether is a type of altcoin, which is the name given to any cryptocurrency which is not Bitcoin. Ether acts as a form of payment exchanged between Ethereum’s clients and the programs or machines carrying out the smart contract operations, and also as a type of “fuel” to feed the platform. With the possibility of payment in Ether there is incentive for developers to produce finely tuned programs, ensuring the platform’s optimal performance.
Ether can also be traded on cryptocurrency exchanges – its use is not confined to Ethereum.