While Bitcoin’s blockchain is truly remarkable, it was designed for digital currency. However, the blockchain can be used for so much more than merely recording monetary transactions.
A simple example would be physical asset ownership, such as a car. Currently, ownership of a car is recorded by the government based on license plate numbers and/or chassis number. However, governments are bound by geographical boundaries. If a car is stolen and manages to cross the boundary, it is almost impossible to recover.
Using the blockchain, the ownership of a car is readily accessible; unlike governmental bodies, the blockchain is not bound by geography.
Enter 2nd Generation Blockchain
To understand this, we now take a closer look at Ethereum. Often paired together with Bitcoin as a cryptocurrency, it is actually a platform that uses the currency Ether (price as of writing, ETH $715). The purpose of the platform is to draw up ‘smart contracts’ and conduct transactions, and these processes are fueled by ETH.
What Are Smart Contracts?
A smart contract is a contract that is coded, and subsequently uploaded to the blockchain. Whenever a contract is executed, every node in the network runs it, then uploads it to the blockchain.
The smart contract is, in essence, a coded ‘If-Then’ statement. If certain requirements are met, the terms of the contract are executed. This process is trustless; it cannot be tampered with by any party, nor can any party cheat and renege on its end of the deal. The introduction of the smart contract to the blockchain technology has many practical functions, as highlighted by the simple example of online shopping.
Example of Traditional Online Shopping
John wishes to purchase a new phone from Vendor A. He is required to make payment upfront, and the product will be shipped to him within 3 working days after the vendor has received payment.
There are a few issues that might arise in this scenario.
Issue 1: John cannot find any reviews of Vendor A online. He is hesitant to pay upfront.
Issue 2: Vendor A has to receive payment upfront, or else John might not pay after receiving the product.
Issue 3: The shipping company might lose the product, John does not get his item, and Vendor A gets a poor reputation.
All of these potential problems can be resolved using a smart contract.
1. John only pays for the product upon delivery to him.
2. Vendor A is guaranteed payment upon John receiving the product.
3. The shipping company will compensate Vendor A if the product is lost/damaged, and John will be made aware that it was not the fault of the vendor.
This entire process requires no middleman to ensure that the deal is upheld, nor is there a need for paperwork filing and administration fees: the entire contract is executed and entered into the blockchain without interference, making it binding and immutable.
2nd Generation Blockchain Technology takes it a step up, and is more than a simple digital currency. It has evolved into a platform for the creation of decentralised applications, which can be integrated into many aspects of daily life to reduce cost and improve efficiency.
Stay tuned for the final article on Generation 3 Blockchain Technology!