This paper offers “jargon-free” guidance providing a high-level understanding of smart contracts and Ethereum. We use concise examples, distilling the complex “crypto-speak” vocabulary of digital assets into simpler terms. We’ll offer context and clarity around this week’s widely publicized “Ethereum Merge”, a software upgrade that is the first of many future steps to secure Ethereum’s status as the dominant smart contract platform. The “Merge” represents one of the biggest moments in the short history of digital assets and provides an opportunity to continue the learning journey for this nascent asset class.
- Define smart centontracts differentiating their decentralized functionality from the centralized nature of traditional paper contracts by removing the middleman.
- Explain the mechanics of decralized transaction validation in common sense terminology, differentiating it from centralized transaction settlement.
- Introduce Ethereum’s prominence in the digital asset ecosystem and its dominance within the smart contract sector, the crypto super-highway.
- Illustrate that the “Merge” is simply a software conversion where old and new systems run in parallel to test them prior to “merging” into the upgraded platform.
- Differentiate between the “proof-of-work” mining and “proof-of-stake” validation consensus mechanisms in smart contract transaction settlement.
- Offer potential future paths and implications.
Smart contract primer
Smart contracts perform the same intended function as paper contracts helping buyers and sellers exchange property, goods, and services at agreed upon terms in agreed upon currencies. They are computer programs (software) stored on blockchain ledgers that automatically execute the terms of a contract between a buyer and seller once pre-defined conditions have been met. Upon settlement, the seller receives payment usually in ether (the native crypto token for the Ethereum blockchain) or a stablecoin. Smart Contracts are a fast, secure and decentralized way to effect digital asset business and financial transactions. They are the new information super highway and critically important to other decentralized crypto applications (DApps) that depend on them to function.
Key concept: decentralized vs centralized
Decentralization simply means that the services of a middleman or intermediary, such as an attorney or financial institution, are not required to set the terms of an agreement or enforce its execution. Decentralization is at the heart of crypto assets and dates to Bitcoin’s October 31, 2008 launch when it stated in its white paper:
“...any two willing parties to transact directly with each other without the need for a trusted third party.”
In this case, the third party reference was to the U.S. banking system. The reliance on decentralization was born from the Bitcoin creator’s distrust of the Federal Reserve at the heights of panic during the great Financial Crisis in 2008 and has become a central tenet of most public blockchain projects and cryptocurrencies. Below are some of the key differentiators between smart contracts utilizing blockchain technology and traditional paper contracts.
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