Blockchain 101: Smart Contracts

How smart contracts function on the Ethereum blockchain and instill trust

Sep 26th - Blockchain 101- Smart Contracts

At the beginning of September, we published a piece called Blockchain 101 that highlighted four important aspects of blockchain technology. Today we continue the series with a deeper look at one of those four aspects: smart contracts. 

 

ODEM’s blockchain-based education marketplace and blockchain-secured education credentials are implemented on Ethereum, an open source, public blockchain that supports smart contract functionality. This is a critical benefit of Ethereum; it’s the technical component that allows for decentralized application (DApp) development and makes the blockchain programmable. Smart contracts allow users of the decentralized network to exchange value in a way that’s predetermined, transparent and secure.

 

Credible transactions

Briefly explained in my previous post, smart contracts are digital contracts that provide nodes (networked computers) with clear instructions for actions to be performed and recorded on the blockchain. As such, smart contracts are computer protocols, designed to validate and enforce digital agreements. 

 

With system inputs, smart contracts allow computers to autonomously and automatically complete tasks. These tasks are programmed as “if this, then that” code - also referred to as if-this-then-that logic (IFTTT logic). This means that something must happen to trigger the smart contract. For example, a financial transaction involves a first party to send funds. The smart contract receives the funds and then distributes them to the designated second party. This transaction can take place autonomously, without an intermediary routing the funds, because the transaction was submitted to follow the coded directions of the smart contract; provide address and funds and the transfer will be initiated. 

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Designed as digital agreements, smart contracts also support legal contracts, the transfer of communication, or creation of connections. As such, they fill the role of traditional intermediaries like a clearing house in the financial markets, a lawyer processing legal contracts or an education marketplace directly connecting students with educators. Smart contracts are flexible and permissionless, giving them a wide range of uses for globally distributed parties to trust in the outcome of an agreed upon transaction. 

 

Before we give all the credit to the team who developed the Ethereum blockchain (see the white paper), Bitcoin was the first blockchain to support smart contracts. The Bitcoin blockchain implemented smart contracts so that its native cryptocurrency could be transferred directly from peer-to-peer. But this is also where Bitcoin’s smart contracts stop as they’re limited to serving just the cryptocurrency. Coindesk explains that, “by contrast, Ethereum replaces Bitcoin’s more restrictive language (a scripting language of a hundred or so scripts) and replaces it with a language that allows developers to write their own programs.” 

 

Creating trust: how they work

Smart contracts can replace intermediaries and instill trust in a decentralized system. For example, this is how decentralized exchanges (DEXs) function. Your traditional financial exchange requires the receipt, confirmation of funds and movement of funds by a middleman. DEXs, which exchange digital assets like cryptocurrencies, have replaced these middlemen with smart contracts, increasing the efficiency, accuracy, transparency and reliability of value transfer. 

 

This creation of trust is invaluable in a digital system. While smart contracts provide a service that instills trust, it’s the math-based code behind them that gives the contracts their verifiability. Described by blockchain.hub, smart contracts are based on “self-enforcing agreement embedded in computer code managed by a blockchain.” 

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Computer code is somewhat intangible; it’s hard for people who don’t understand how software functions to believe in the strength of math-based protocols. But smart contracts are more deserving of our trust than the middlemen we trust today in banking, ride-sharing apps, credit bureaus, social media services and global communication services like email. We’ve seen time and again that the companies who process our requests and store our information, can’t be trusted to secure or appropriately manage our data. But code is not negotiable. There’s no agenda hidden in code, it’s as clear as it’s written. When a smart contract is set up to execute certain commands, it will do just that.

 

The marketplace advantage 

Smart contracts provide an opportunity for independent connections to be made, a perfect use case for a decentralized marketplace. The governing authority traditionally facilitates marketplaces, in modern day cases this is an Uber or Upwork. In the case of ODEM’s education marketplace, ODEM provides the foundation for connections, but allows for the participants, students, educators and employers to determine their value by leveraging the marketplace. 

 

Participants engage via the architecture of the marketplace, with clear directions about how to choose courses and other offerings. At the code level, the protocol responds to the input, a course selection and financial payment, and provides an output, registration for the course with confirmation of payment. The benefit here is that the user has greater autonomy, resulting in a better marketplace experience and more ownership over their continued learning journey.

 

For more about why ODEM chose to build on the Ethereum blockchain, check out this post. Learn more about ODEM, and join the conversations on Telegram, LinkedIn, Facebook and Twitter.

 

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