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Blockchain technology has emerged as an industry leader, providing safe and transparent solutions for a wide range of industries. The use of smart contracts is one of its most promising applications. In this blog, we are going to discuss the fundamental idea of blockchain and the involvement of smart contracts.
Blockchain is a system that maintains public transactional information, also known as blocks, in numerous databases, referred to as the “chain,” in a network connected by peer-to-peer nodes. This storage type is sometimes called a ‘digital ledger.’
As the name suggests, blockchain is a chain of blocks open to anyone. The main advantage of blockchain is that once data has been recorded inside a blockchain, it becomes complicated to change it. Each block has a hash of the previous block, a hash of this block, and some data. The kind of blockchain determines what information is kept in each block.
You can think of a hash as a fingerprint. It is always distinct and uniquely identifies the block together with all of its contents. The hash changes when something inside the block is changed and the new block is recognised by the changed hash.
A chain of blocks is created effectively because of the third element inside a block, the hash of the previous block. The security of a blockchain comes from the creative use of hashing and the proof-of-work (PoW).
However, it’s worth noting that the landscape of blockchain technology is evolving, and many chains have migrated from proof-of-work to a newer consensus mechanism called proof-of-stake (PoS). The states in blockchain represent the various stages or conditions of a digital ledger, reflecting the history of transactions and their current status. Each state of the blockchain ledger is built upon the previous one chronologically and irreversibly.
PoS and PoS are two of the consensus mechanisms that play a crucial role in the security of blockchains. The security in PoW comes from the difficulty of solving complex mathematical puzzles and this process is called Mining. For a transaction to be confirmed and added to the blockchain, it must be included in a block that has been mined successfully.
Once the majority of miners agree on a particular version of the blockchain, it becomes the accepted version, ensuring security through consensus. So, to successfully tamper with a blockchain one has to tamper with all blocks on the chain, redo the proof-of-work for each block, and take control of more than 50% of the peer-to-peer network. This is almost impossible to do.
In PoS, security is ensured through participants, often called validators or stakers, who lock up a certain amount of cryptocurrency as collateral (their “stake”) to participate in block creation and validation. The more cryptocurrency you stake, the higher the chance you have of being chosen to create the next block. Since their assets are at risk, validators are motivated to behave honestly and in the best interest of the network.
If they validate fraudulent or malicious transactions, they risk losing their staked coins. PoS is considered more environmentally friendly and energy-efficient compared to PoW because it doesn’t require the massive computational power needed for mining. This makes it more sustainable in the long term. Today, PoW is used by cryptocurrencies like Bitcoin and Litecoin. Ethereum switched to PoS.
Smart contracts are just like contracts in the real world. The only difference is that they are completely digital. This program is stored inside a blockchain. Let’s take a look at how a smart contract works with an example.
Assume a project requires some investors. One can program a smart contract so that it holds all the received funds until a certain goal is reached. The supporters of the project can transfer their money to the smart contract. If the project gets fully funded, the contract automatically passes the money to the creator of the project. And if the project fails to meet the goal, the money automatically goes back to the supporters.
Well because smart contracts are stored on blockchain, they inherit some properties that we already discussed. They are immutable and they are distributed. Being immutable means that once a smart contract is created, it can never be changed. The validation of smart contract outputs is distributed and relies on the consensus of a subset of nodes in the network.
The specific details of how this validation is achieved can vary depending on the blockchain’s consensus mechanism. So a single person cannot force the contract to release the funds because it has to go through a validation process.
There are a handful of blockchains that support smart contracts, but the biggest one is Ethereum. It was specifically created and designed to support smart contracts. They can be programmed in a special language called Solidity.
Smart contracts can be applied to many different things, not just to crowdfunding. Few of them are,
Smart contracts transform transactions by automating procedures, lowering costs, increasing transparency, and removing intermediaries. The potential uses of smart contracts are unlimited as blockchain continues to expand, suggesting a future in which trust, efficiency, and security are effortlessly linked to our everyday interactions.
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