Cryptocurrency is entirely dependent on Block Chains to maintain their transactions. A block is like a page of a ledger book where some transactions are written in ink, permanent which cannot be altered. A block typically consists of transactions of bitcoin or any other cryptocurrency and the details of transactions - who has sent, who has received, timestamp and previous blocks information to link it to the Block chain. This information is passed through a hashing algorithm like SHA 256 and creates a 32-bit hash value. This hash value is irreversible.
Thus a block is a permanent store of records, which once written cannot be altered. It is very difficult and nearly impossible to delete one block from the block chain, because it will make all the remaining blocks invalid. These are the prime features of a block chain which makes a block chain a very safe and at the same time a transparent network.
Now, having understood what is a block and how does it work, let us check whether the same methodology can be used in dealing with other valuables? Yes … Block chain can be used while you exchange other valuables like money, property or shares without entertaining any middleman, by using the Smart Contract.
A Contract is an agreement between two parties (people or organizations) who agree to a set of conditions for carrying out a transaction. Say, for example, when I am selling you my Mercedes, we will have many terms for the sale, such as the Price, payment terms, documents to be exchanged, servicing or repairs to be done to the vehicle before handing over etc., All these terms of agreement are written and signed by both parties and will be notarized or handed over to a third party mediator to carry out the transaction smoothly. If the same agreement is computerized and created and executed using a Block chain, it is called a Smart Contract.
A Smart contract is a computer code which is built into a Block chain to facilitate, verify and operate the contract under a set of mutually agreed conditions. Smart Contracts are stored in Block Chain to eliminate a third person or replace lawyers and of course it saves a lot of time and money. Blocks chains are proved to be faster, cheaper and more secure to carry out these contracts. Even Banks and Governments are turning towards Smart Contracts.
Digital contracts are self-executing as the entire information is given in a software code which executes when the conditions are met. This was realized by Nick Szabo way back in 1994.
Smart Contracts are autonomous. You do not need any broker or lawyer to make an agreement, and hence rules out any manipulation. Smart contracts not only define the rules and regulations like a traditional contract, but also enforce them automatically, without any obligations.
Smart contracts are the documents encrypted on a shared ledger, and every node in the block chain has a copy of it. There is no way that it can be lost. Backup of the documents is an excellent feature of Block Chain.
Documents will be safe because of encryption and hashing algorithm. Since the contracts are encoded into the block chain, they will keep track of the terms and conditions and will automatically get executed. Even the two agreement holders cannot change or interfere once a smart contract is created.
Validating the conditions to follow the next instruction is very fast in Smart contracts due to computerization and Software coding. This also makes the smart contracts a lot more accurate.
We can use smart contracts for insurance premiums, property, financial services, legal procedures and even credit enforcement. Ethereum Block chain is the most commonly used platform for implementing Smart Contracts.