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Ethereum’s Smart Contracts Explained
Blockchain technology is a game-changing phenomenon that has disrupted multiple industries by enabling safe, decentralised solutions for diverse transactions and operations. Implementing smart contracts is one of the most prominent uses of blockchain technology.
A smart contract is a self-executing contract in which the conditions of the buyer-seller agreement are directly encoded into lines of code. In 2013, Ethereum, the second largest blockchain network, pioneered the notion of smart contracts. Smart contracts have now become a vital element of many businesses, providing efficient and secure solutions for various business activities.
What Are Ethereum Smart Contracts?
They are self-executing contracts with the terms of the agreement between buyer and seller being written into lines of code. These contracts run on the Ethereum blockchain, a decentralised and secure platform. The code in the smart contract is automatically executed when specific conditions are met, eliminating the need for intermediaries and increasing the efficiency and security of the transaction.
Ethereum smart contracts are written in Solidity, a computer language comparable to JavaScript. The code defines the circumstances under which the contract will be carried out and the actions that will be executed if those requirements are satisfied. A smart contract, for example, might be used to transfer ownership of a digital asset from one party to another whenever specific criteria are met.
One of the primary advantages of smart contracts is that they can automate the process of contract execution, saving time and lowering the risk of human mistakes. As a result, they are ideal for a variety of industries, including banking, real estate, supply chain management, and others.
How Do Ethereum Smart Contracts Work?
Smart contracts automate the process of executing specific conditions when triggered by events, such as a transfer of funds. The requirements are pre-written in the code and enforced automatically once met. For instance, a smart contract can immediately release payment to a seller only after the buyer receives a product. In this way, smart contracts enforce the terms of an agreement automatically.
A smart contract process follows steps similar to the below example of buying and selling a product.
- The buyer and the seller agree on the terms of the sale, including price and delivery date.
- The buyer sends the agreed-upon amount of cryptocurrency, typically Ether, to the smart contract’s address.
- The smart contract code verifies if the conditions of the sale have been met, such as the receipt of the agreed-upon amount of cryptocurrency.
- If the conditions are met, the smart contract executes the terms of the agreement automatically. For example, it transfers ownership of the product to the buyer.
- The buyer now has access to the product and the seller has received payment. Both parties can trust that the smart contract has fulfilled and enforced the agreement.
- The Ethereum blockchain records the details of the transaction, including the product ownership transfer and payment. This provides a secure and permanent record of the transaction.
This process provides a secure and transparent way for individuals to buy and sell products using cryptocurrency. By using smart contracts, the risk of fraud and the need for intermediaries is reduced, and the process of buying and selling products is streamlined and automated.
The Technology Behind Smart Contracts
The Ethereum blockchain powers the technology underneath. This decentralised and distributed ledger securely records transactions and data. Smart contracts are self-executing computer programs that run on the Ethereum blockchain and enforce the terms of an agreement automatically.
Developers write these contracts in a high-level programming language and compile them into low-level bytecode, which the Ethereum blockchain stores. The Ethereum Virtual Machine, a computer network that runs the Ethereum blockchain, executes the bytecode. When someone makes a transaction on the Ethereum blockchain, it triggers the smart contract to run and enforce the agreement’s terms.
The decentralised and distributed nature of the ledger ensures the security and transparency of the agreement’s terms, as multiple computers store the transaction details, and anyone can audit them. By using smart contracts, individuals can automate various agreements and transactions, reducing the risk of fraud and the need for intermediaries.
Benefits of Ethereum Smart Contracts
Ethereum smart contracts offer numerous benefits to individuals and organisations. They reduce transaction costs and increase efficiency by eliminating the need for intermediaries. The self-executing nature of smart contracts ensures that the terms of an agreement are automatically enforced, increasing the security and transparency of transactions.
In addition, using a decentralised and distributed ledger eliminates the risk of fraud, as all transactions are recorded on multiple computers and can be audited by anyone.
A recent survey by Deloitte showed that 72% of executives believe that smart contracts will play a significant role in the future of business. At the same time, the market for decentralised finance (DeFi) applications built on the Ethereum blockchain has grown to over $40 billion in just a few years. These statistics show that Ethereum smart contracts are poised to play a significant role in shaping the future of various industries and revolutionising the way we do business.
Industries Benefiting From Ethereum Smart Contracts
Ethereum smart contracts have the potential to revolutionise various sectors by providing secure and efficient solutions for different business processes.
Logistics
Smart contracts can be used in the supply chain sector to automate tracking items as they move through the supply chain. This can increase the supply chain’s efficiency and transparency, lowering the risk of fraud and ensuring that items are delivered on time.
Real Estate
Smart contracts can be used in real estate to simplify purchasing and selling property, removing the need for middlemen such as real estate agents. Smart contracts can save time, money, and minimise the risk of fraud by automating the process.
Healthcare
Ethereum smart contracts can transform the healthcare industry by automating and optimising numerous operations. For example, electronic health records (EHRs) can be securely stored and maintained on the blockchain using smart contracts, boosting patient data privacy and security while making it easier for healthcare practitioners to access and exchange information.
Smart contracts may also help clinical studies by automating processes like delivering payments to participants when specific milestones are fulfilled and collecting and storing participant data.
Gaming
Ethereum smart contracts have the potential to change the gaming industry by allowing gamers to engage with games and participate in the gaming economy in new and inventive ways. They, for example, may be used to build decentralised, player-driven markets where users can buy, sell and exchange virtual commodities and currencies. The blockchain secures these markets, giving participants more transparency and security while participating in transactions.
Smart contracts could automate the hosting of in-game tournaments, such as awarding prizes and collecting entrance fees from players. Smart contracts can also build decentralised gaming platforms where participants can play games and earn rewards directly from the platform.
Companies Using Ethereum Smart Contracts
Many companies have adopted Ethereum smart contracts to provide secure and efficient solutions for their business processes. Some of the companies using Ethereum smart contracts include:
- Microsoft: Microsoft has adopted Ethereum smart contracts to provide a secure and transparent platform for managing the supply chain of its products.
- JPMorgan Chase: JPMorgan Chase is using them to increase the efficiency and security of its cross-border payments.
- Accenture: Accenture uses them to provide secure and transparent solutions for its clients’ supply chains.
Companies will continue to adopt blockchain technology as it evolves and offers significant business benefits.
Getting started with Ethereum smart contracts requires a company to understand Ethereum and blockchain technology. They can begin by educating themselves on the Ethereum blockchain, smart contracts, and the Solidity programming language.
Hiring a team of developers with experience in Ethereum and blockchain technology is also a great idea. This team will develop, test, and deploy the company’s smart contracts.
The next step would be choosing a development environment, such as Remix, Truffle, or Ganache, to build and test their smart contracts.
Finally, the company can deploy their smart contracts on the Ethereum blockchain and start using them to automate its business processes, increase transparency and security, and reduce costs. With the right team, resources, and determination, any company can get started with Ethereum smart contracts and leverage the power of decentralised technology.
Closing Thoughts
According to a report by Grand View Research, the global smart contract market is expected to reach $1.4 billion by 2025, growing at a CAGR of 25.2% from 2020 to 2025.
The future of the Ethereum blockchain is exciting and holds great potential for growth and development. In the next ten years, we can expect to see the following:
- Increased Adoption: As more individuals and organisations become aware of the benefits of decentralised technology, we can expect to see a significant increase in Ethereum blockchain adoption.
- Expansion of Decentralised Applications: The Ethereum blockchain allows for the creation of decentralised applications (dApps) that can run on the blockchain. We can expect to see the continued growth of this ecosystem with the development of new and innovative dApps.
- Development of New Use Cases: As the Ethereum blockchain evolves, it will likely lead to the creation of new use cases and applications. This could include decentralised finance, prediction markets, and more.
- Scaling Solutions: Scalability has been a significant challenge for the Ethereum blockchain. However, with the development of new scaling solutions, such as sharding, we can expect the Ethereum blockchain to be able to handle more transactions and become more widely adopted.
- More Competition: As the Ethereum blockchain grows, we can expect to see more competition from other blockchain platforms. However, the Ethereum blockchain has a large and established community, giving it a competitive advantage.
Overall, the future of the Ethereum blockchain is bright, and we expect to see continued growth and development in the coming years. The decentralised and distributed nature of the blockchain provides the potential for dramatically enhanced security, transparency, and efficiency in various industries.
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What is cryptocurrency?
Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.
How does cryptocurrency work?
Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.
Cryptocurrency examples
There are thousands of cryptocurrencies. Some of the best known include:
Bitcoin:
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
Ethereum:
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
Litecoin:
This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
Ripple:
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.
How to buy cryptocurrency
You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:
Step 1: Choosing a platform
The first step is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:
- Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
- Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.
When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.
Step 2: Funding your account
Once you have chosen your platform, the next step is to fund your account so you can begin trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.
Crypto purchases with credit cards are considered risky, and some exchanges don't support them. Some credit card companies don't allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.
Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.
An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.
Step 3: Placing an order
You can place an order via your broker's or exchange's web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting "buy," choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to "sell" orders.
There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:
- Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market.
- Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
- Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.
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How to store cryptocurrency
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
Hot wallet storage: "hot wallets" refer to crypto storage that uses online software to protect the private keys to your assets.Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.Typically, cold wallets tend to charge fees, while hot wallets don't. -
What can you buy with cryptocurrency?
When it was first launched, Bitcoin was intended to be a medium for daily transactions, making it possible to buy everything from a cup of coffee to a computer or even big-ticket items like real estate. That hasn’t quite materialized and, while the number of institutions accepting cryptocurrencies is growing, large transactions involving it are rare. Even so, it is possible to buy a wide variety of products from e-commerce websites using crypto. Here are some examples:
Technology and e-commerce sites:
Several companies that sell tech products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.
Luxury goods:
Some luxury retailers accept crypto as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in return for Bitcoin.
Cars:
Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.
Insurance:
In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a mode of payment for all its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.
If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.
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Cryptocurrency fraud and cryptocurrency scams
Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:
Fake websites: Bogus sites which feature fake testimonials and crypto jargon promising massive, guaranteed returns, provided you keep investing.
Virtual Ponzi schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors’ money. One scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.
"Celebrity" endorsements: Scammers pose online as billionaires or well-known names who promise to multiply your investment in a virtual currency but instead steal what you send. They may also use messaging apps or chat rooms to start rumours that a famous businessperson is backing a specific cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their stake, and the currency reduces in value.
Romance scams: The FBI warns of a trend in online dating scams, where tricksters persuade people they meet on dating apps or social media to invest or trade in virtual currencies. The FBI’s Internet Crime Complaint Centre fielded more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021, with losses reaching $133 million.
Otherwise, fraudsters may pose as legitimate virtual currency traders or set up bogus exchanges to trick people into giving them money. Another crypto scam involves fraudulent sales pitches for individual retirement accounts in cryptocurrencies. Then there is straightforward cryptocurrency hacking, where criminals break into the digital wallets where people store their virtual currency to steal it.
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Is cryptocurrency safe?
Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into "blocks" and time stamped. It's a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that's hard for hackers to tamper with.
In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.
While securities are in place, that does not mean cryptocurrencies are un-hackable. Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.
Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This can create wild swings that produce significant gains for investors or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.
Four tips to invest in cryptocurrency safely
According to Consumer Reports, all investments carry risk, but some experts consider cryptocurrency to be one of the riskier investment choices out there. If you are planning to invest in cryptocurrencies, these tips can help you make educated choices.
Research exchanges:
Before you invest, learn about cryptocurrency exchanges. It’s estimated that there are over 500 exchanges to choose from. Do your research, read reviews, and talk with more experienced investors before moving forward.
Know how to store your digital currency:
If you buy cryptocurrency, you have to store it. You can keep it on an exchange or in a digital wallet. While there are different kinds of wallets, each has its benefits, technical requirements, and security. As with exchanges, you should investigate your storage choices before investing.
Diversify your investments:
Diversification is key to any good investment strategy, and this holds true when you are investing in cryptocurrency. Don't put all your money in Bitcoin, for example, just because that's the name you know. There are thousands of options, and it's better to spread your investment across several currencies.
Prepare for volatility:
The cryptocurrency market is highly volatile, so be prepared for ups and downs. You will see dramatic swings in prices. If your investment portfolio or mental wellbeing can't handle that, cryptocurrency might not be a wise choice for you.
Cryptocurrency is all the rage right now, but remember, it is still in its relative infancy and is considered highly speculative. Investing in something new comes with challenges, so be prepared. If you plan to participate, do your research, and invest conservatively to start.
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Understanding Decentralized Applications (dApps)
A web app such as Uber or X (formerly Twitter) runs on a computer system that is owned and operated by a company with authority over the app and its workings. No matter how many users there are, the backend is controlled by the company.
DApps operate a bit differently. They run on a P2P or a blockchain network. For example, BitTorrent, Tor, and Popcorn Time are applications that run on computers that are part of a P2P network, which allows multiple participants to consume, feed, or seed content.
DApps are similar but run on a blockchain network in a public, open-source, decentralized environment. They are free from control and interference by any single authority. For example, a developer can create an X-like dApp and put it on a blockchain where any user can publish messages. Once posted, no one except the message originator can delete the messages.
Difference Between a Centralized and Decentralized App
A centralized app has a single owner. The application software for a centralized app resides on one or more servers controlled by the owner. Users interact with the app by downloading a copy of it and then sending and receiving data back and forth from the company's server.
A decentralized app operates on a blockchain or peer-to-peer network of computers. Users engage in transactions directly with one another rather than relying on a central authority to facilitate them. The dApp might be free, or the user might need to pay the developer in cryptocurrency to download and use the program's source code. The source code nearly always uses smart contracts, which complete transactions between people. Smart contracts remove the need to trust that the other party will execute their part of a transaction. The apps also rely on blockchain protocols that hide personal information.
Importance of dApps
There are several dApp features that can dramatically change the facilitation of information or resources.
Cost and Efficiency
Because dApps operate on decentralized networks, there is no need for an intermediary. This can lead to reduced costs, increased efficiency, and greater accessibility. For example, instead of having to rely on a bank, imagine having nearly 100% control of every aspect of your finances. This can have major implications for many industries, especially the financial sector.
Security
Because dApps leverage blockchain technology, these solutions can also help improve security in many business and personal processes. Blockchains make data immutable by leveraging cryptographic techniques and distributed automated consensus. Because the ledger is shared and compared across all users, data cannot be altered.
Accessibility
DApps are accessible to anyone with an internet connection. It doesn't matter where you live—all you need is internet access. This global accessibility democratizes access to many different types of services, digital assets, and information.
Transparency
Blockchain-based dApps maintain transparent records of transactions, meaning users can verify the integrity of data without relying on centralized authorities. This transparency is critical for distributed and anonymous networks because users need to know the system is trustworthy.
DApp Uses
DApps have been developed to decentralize a range of functions and applications and eliminate intermediaries. Examples include self-executing financial contracts, multi-user games, and social media platforms.
DApps have also been developed to enable secure, blockchain-based voting and governance. They can even be integrated into web browsers to function as plugins that help serve ads, track user behavior, or solicit crypto donations.
Some examples of practical uses for dApps include:
- Financial services: Facilitating peer-to-peer financial transactions, such as currency exchanges or asset transfers.
- Supply chain management: Tracking the movement of goods through a supply chain, ensuring transparency and accountability.
- Identity verification: Securely storing and verifying identity information, such as for voter rolls or passport applications.
- Real estate: Facilitating real estate transactions directly between buyer and seller, tracking property ownership and related documentation, such as deeds.
- Healthcare: Storing and tracking healthcare records and facilitating communications between healthcare professionals.
- Education: Creating decentralized learning platforms that allow students and teachers to interact and collaborate directly without the need for intermediaries.
- Social media: Creating decentralized social media platforms that allow users to interact and share content without being censored by a centralized authority.
- Predictive markets: Creating decentralized platforms for predictive markets, allowing users to make bets on any event.
Scams Involving dApps
Scams have been perpetrated through dApps. Ponzi schemes, in which early investors are paid using the investments of more recent investors to create the appearance of big profits, have been known to occur on dApps.
Fake initial coin offerings (ICOs) have been used to raise funds for developing a new cryptocurrency or dApp that the fundraisers have no intention of creating.
Phishing attacks, which use fake websites or emails to trick people into revealing sensitive information, have been seen on dApps. In addition, some dApps have been used to distribute malware or viruses, which can compromise users' devices and steal sensitive information.
Users should be cautious and do their due diligence when interacting with dApps, as the decentralized nature of these applications can make it difficult to track or hold perpetrators accountable.
Advantages and Disadvantages of dApps
Advantages
Many of the advantages of dApps center around their ability to safeguard user privacy. DApps use smart contracts to complete transactions between two anonymous parties.
Free speech proponents point out that dApps can be developed as alternative social media platforms. A decentralized social media platform is resistant to censorship because no single participant on the blockchain can delete or block messages.
Ethereum is a flexible platform for creating new dApps, providing the infrastructure needed for developers to focus their efforts on finding innovative uses for digital applications. This could enable the rapid deployment of dApps in several industries, including banking and finance, gaming, social media, and online shopping.
Disadvantages
DApps are still in the early stages, so they are experimental and prone to certain problems and unknowns. Questions arise about whether the applications will be able to scale effectively. Also, there are concerns that too many applications requiring computational resources will overload a network, causing congestion.
The ability to develop a user-friendly interface is another concern. Most apps developed by traditional centralized institutions have an ease-of-use expectation that encourages users to use and interact with the app. Getting people to transition to dApps will require developers to create an end-user experience and level of performance that rivals popular and established programs.
Because they are decentralized, dApps are not subject to the oversight and auditing most centralized applications are exposed to. If the application's programming is rushed, unaudited, or sloppy, hackers will find it easy to break into it.
Once deployed, a dApp is likely to need ongoing changes to make enhancements or correct bugs or security risks. According to Ethereum, it can be challenging for developers to update dApps because the data and code published to the blockchain are hard to modify.
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Promotes user privacy
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Resists censorship
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Flexible platform enables dApp development
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Experimental, may not be able to scale
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Challenges in developing a user-friendly interface
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Difficult to make needed code modifications
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Security issues if programming is sloppy
Regulatory Considerations for dApps
One of the primary challenges regulators face with dApps is their decentralized nature. Traditional regulatory considerations are usually based on a specific location; since dApps are not centralized, it's tougher to regulate activity based on where transactions occur.
The Emerging Centralization of dApps
Consider the General Data Protection Regulation (GDPR) and its implementation within the European Union. DApp providers that serve the EU audience must comply with GDPR requirements, regardless of their home jurisdiction.
In December 2023, a European subnet of the Internet Computer Protocol (ICP, a blockchain DAO) was launched that provides an infrastructure and set of tools developers can use to create compliant dApps.6 If using the ICP becomes the standard way of ensuring compliance, the apps lose their decentralized standing because the ICP is centralized—nodes must be voted in by the DAO and can only be located in the EU.
Some dApps issue tokens or conduct token sales to raise money. This may raise regulatory concerns as authorities work to protect investors—it is viewed by regulators as an unregistered securities issuance. In a similar manner, dApps involved in financial services, such as decentralized exchanges (DEXs) or lending platforms, must adhere to anti-money laundering or know-your-client regulations to prevent money laundering and terrorist financing.
Consumer Protection
There is also a consumer protection element even if the user is not exchanging money or goods. This includes personal data, privacy, and security protection. Agreeing to the transactions via signature puts users at risk; platforms such as MetaMask warn users to be aware that they could lose funds if they're unaware of what they agree to when using dApps.
Example of dApps
One popular example of a dApp is CryptoKitties.9 CryptoKitties is a blockchain-based virtual game that allows players to adopt, raise, and trade virtual cats. The game is one of the world’s first forms of interactive blockchain dApps.
Each CryptoKitty is unique, owned by the user, and validated through the blockchain. Like other types of tradeable assets, its value can appreciate or depreciate based on the market. CryptoKitties are considered “crypto collectibles” because each digital pet is one-of-a-kind and verified on a blockchain.
Another example is Uniswap, a decentralized exchange protocol built on Ethereum.10 Uniswap enables users to trade directly with each other without needing an intermediary, like a bank or broker. This dApp uses automated smart contracts to create liquidity pools that facilitate trades. Users can trade their tokens directly from their wallets, providing a seamless and secure trading experience. Again, the existence of Uniswap is made possible by the decentralized nature of the application.
What Is Meant By Decentralized Application?
Decentralized applications are applications that are generally open source and use or facilitate blockchain and cryptocurrency transactions.
What Is the Most Popular Decentralized Application?
Cryptocurrency wallets like MetaMask are the most popular dApps, followed by exchanges like Uniswap and openSea. Gambling dApps like MetaWin are also very popular.
Is Bitcoin a Decentralized Application?
Bitcoin is decentralized, but it is not an application. It is a blockchain network with a cryptocurrency used as a payment system and speculative investment.
The Bottom Line
Decentralized applications (dApps) are digital applications or programs that run on a decentralized network rather than a single computer or server. They are built on blockchain technology and use cryptocurrency as a means of exchange.
DApps are designed to be open-source, transparent, and resistant to censorship. They allow users to interact directly with the application without intermediaries. DApps have the potential to disrupt traditional industries by allowing for peer-to-peer interactions and transactions without a central authority.
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What is blockchain?
Blockchain is a shared, immutable digital ledger, enabling the recording of transactions and the tracking of assets within a business network and providing a single source of truth.
Blockchain operates as a decentralized distributed database, with data stored across multiple computers, making it resistant to tampering. Transactions are validated through a consensus mechanism, ensuring agreement across the network.
In blockchain technology, each transaction is grouped into blocks, which are then linked together, forming a secure and transparent chain. This structure guarantees data integrity and provides a tamper-proof record, making blockchain ideal for applications like cryptocurrencies and supply chain management.
The key benefit of blockchain lies in its ability to provide security, transparency and trust without relying on traditional intermediaries, such as banks or other third parties. Its design reduces the risk of fraud and errors, making it especially valuable in industries where secure transactions are critical, including finance and healthcare. Additionally, blockchain helps businesses improve efficiency and reduce costs by streamlining processes and enhancing accountability.
The evolution of blockchain
Blockchain technology began with the introduction of Bitcoin in 2008, created by an anonymous figure or group known as Satoshi Nakamoto. Bitcoin’s underlying technology was designed as a decentralized digital currency to enable peer-to-peer transactions without the need for a trusted intermediary like a bank. The blockchain served as a public ledger, securely recording all transactions and preventing double-spending, a key issue for digital currencies at the time.
With the development of platforms like Ethereum in 2015, blockchain began to support smart contracts—digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met.
This development broadened blockchain’s real-world applications, extending into areas such as real estate, finance, supply chain management, healthcare and even voting systems. Over time, blockchain has grown well beyond its cryptocurrency roots, becoming a key player in decentralized finance (DeFi) and non-fungible tokens (NFTs).
Today, blockchain continues to evolve, with ongoing advancements aimed at improving scalability, privacy and its integration with emerging technologies like artificial intelligence (AI) and the Internet of Things (IoT).
According to a report from Statista, blockchain technology is forecast to grow by nearly 1 trillion U.S. dollars by 2032, with a compound annual growth rate (CAGR) of 56.1 percent since 2021.1
Benefits of blockchain
Blockchain technology offers various benefits that transform businesses’ operations, enhancing trust, security, traceability and efficiency across multiple industries.
Here are some top benefits of blockchain:
- Greater trust
- Enhanced security
- Better traceability
- Increased efficiency
- Automated transactions
Greater trust
Blockchain creates a secure, members-only network, ensuring accurate and timely data access. Confidential records are shared only with authorized network members, fostering trust and creating end-to-end visibility across the system.
Enhanced security
Consensus among network members is required to validate data accuracy, and all validated transactions are immutable and permanently recorded. This capability guarantees that no transaction can be deleted, even by a system administrator.
Better traceability
Blockchain offers instant traceability with a transparent audit trail of an asset’s journey. In industries prioritizing sustainability, it enables direct sharing of provenance data, verifying ethical practices. Additionally, it can reveal supply chain inefficiencies, such as delays, driving greater accountability.
Increased efficiency
With a distributed ledger shared among network members, the need for time-consuming record reconciliations is eliminated. Smart contracts, which are stored on the blockchain, can automate processes and speed up transactions.
Automated transactions
Smart contracts facilitate the seamless automation of transactions, enhancing efficiency and accelerating real-time processes. Once predefined conditions are met, they automatically trigger the next step, reducing the need for manual intervention.
Key features of blockchain technology
Blockchain technology contains several key features that enhance security, transparency and efficiency in transactions and data management:
- Distributed ledger technology
- Immutable records
- Smart contracts
- Public key cryptography
Distributed ledger technology
All network participants have access to the distributed ledger and its immutable record of transactions. This shared ledger records transactions only once, eliminating the duplication of effort typical of traditional business networks.
Immutable records
No participant can change or tamper with a transaction after it’s been recorded in the shared ledger. If a transaction record includes an error, a new transaction must be added to reverse the error, and both transactions are then visible.
Smart contracts
Smart contracts are self-executing agreements stored on the blockchain, where the terms are written in code and automatically executed when predefined conditions are met. They can be used for various purposes, such as transferring corporate bonds or triggering travel insurance payouts. By automating these processes, smart contracts speed up transactions, reduce the need for intermediaries and ensure transparency and security.
Public key cryptography
Public key cryptography is a method used to secure transactions and data on the blockchain by leveraging two cryptographic keys: a public key and a private key. The public key serves as an address for receiving cryptocurrency or data, while the private key is a confidential key that grants control over the associated digital assets. The private key holder can authorize transactions, providing security and verifying ownership, while the public key allows others to send funds or data to the correct address.
How blockchain works
Blockchain technology records transactions securely by linking data blocks together. Each block contains important details about asset movements and ensures the integrity of the entire process. Here’s how it works.
1. Records transactions as blocks
Each transaction is recorded as a “block” of data on the blockchain. These blocks capture key details about the movement of assets, whether tangible (such as a product) or intangible (such as intellectual property). The data within each block includes critical information, such as who, what, when, where, the transaction amount, and specific conditions like the temperature of a food shipment.
Additionally, each block contains a timestamp, which records the exact moment the transaction is added to the blockchain. This timestamp ensures the chronological order of transactions and adds an additional layer of verifiability to the data, preventing any retrospective alterations to the recorded information.
2. Connects blocks together
Each block is linked to the previous block and the one after it, creating a secure chain of data. This is done through cryptographic hashes, unique identifiers for each block. The hash of a block includes data from the previous block, ensuring the exact sequence and timing of each transaction. The cryptographic hash makes it nearly impossible to alter any block without changing all subsequent blocks, ensuring the integrity of the entire process.
3. Builds an irreversible blockchain
The blocks are grouped together in an irreversible chain known as a blockchain. Each new block reinforces the security and validation of the previous one, strengthening the entire chain. This makes the blockchain tamper-evident, ensuring malicious actors cannot alter or insert fraudulent transactions into the chain.
Nodes in the blockchain network validate and maintain the blockchain by confirming each transaction’s validity through consensus algorithms, ensuring the system remains secure and immutable. Proof of Work (PoW) and Proof of Stake (PoS) are some of the most commonly used consensus algorithms in blockchain networks, each helping to secure the system while validating transactions.
4. Ensures trust and immutability
With each new block, the blockchain becomes more secure, making it nearly impossible to change past transactions. This immutability provides a trusted, transparent ledger that all network members can rely on, preventing fraud and ensuring that all transaction records are accurate and unchangeable.
Types of blockchain networks
There are several ways to build a blockchain network. They can be public, private, permissioned or consortium-built:
- Public blockchain networks: A public blockchain is open for anyone to join and participate in, such as the Bitcoin blockchain. While it offers decentralization, it also comes with drawbacks, including high computational power requirements, lack of transaction privacy and potentially weaker security. These considerations are crucial, especially for enterprise blockchain use cases.
- Private blockchain networks: A private blockchain network, similar to a public blockchain network, is a decentralized peer-to-peer network. However, one organization governs the network, controlling who is allowed to participate, run a consensus protocol and maintain the shared ledger. Depending on the use case, this can significantly boost trust and confidence between participants. A private blockchain can be run behind a corporate firewall and even be hosted on premises.
- Permissioned blockchain networks: Businesses that set up a private blockchain will generally set up a permissioned blockchain network. It is important to note that public blockchain networks can also be permissioned. This places restrictions on who is allowed to participate in the network and in what record transactions. Participants need to obtain an invitation or permission to join.
- Consortium blockchain networks: A consortium blockchain network is managed by a group of preselected organizations that share the responsibility of maintaining the blockchain. These organizations determine who can submit transactions and access data. This type of network is ideal when multiple parties need to collaborate with shared responsibilities, such as in the energy sector, where multiple energy producers and consumers might share data about power usage and distribution.
Blockchain protocols and platforms
Blockchain protocols are the set of rules that govern how data is recorded, shared and secured within a blockchain network. These protocols establish the foundation for the network’s operation. However, to fully take advantage of these protocols, developers need a platform that provides the environment and tools to build, deploy and interact with decentralized applications (dApps).
Blockchain platforms, therefore, build on top of these protocols, offering the necessary infrastructure and services to create and run apps within the blockchain ecosystem. While protocols define the core functionality, platforms extend this functionality by enabling the development of practical solutions.
Blockchain protocols and platforms often overlap, as platforms usually rely on specific protocols to operate.
Here’s a rundown of common blockchain protocols and platforms:
- Hyperledger Fabric
- Ethereum
- Corda
- Quorum
Hyperledger Fabric
Hyperledger Fabric, an open-source project from the Linux® Foundation, is the modular blockchain framework and has become the unofficial standard for enterprise blockchain platforms like the IBM Blockchain® Platform. Intended as a foundation for developing enterprise-grade applications and industry strategies, the open, modular architecture of Hyperledger Fabric uses plug-and-play components to accommodate a wide range of business use cases.
Ethereum
Ethereum is a decentralized, open-source blockchain platform that allows developers to build and deploy smart contracts and decentralized applications. Ethereum Enterprise is designed specifically for business blockchain applications.
Corda
Corda is a distributed ledger platform designed for businesses, enabling secure and private transactions on permissioned networks. It allows organizations to share data and execute agreements with only the relevant parties, making it ideal for industries like finance, healthcare and supply chain management. Corda prioritizes privacy, scalability and regulatory compliance.
Quorum
Quorum is an open-source, permissioned blockchain platform based on Ethereum, designed for enterprise use. It provides high privacy and scalability, allowing businesses to run smart contracts and conduct transactions securely within a private network. Quorum supports features like transaction privacy and faster consensus mechanisms, making it ideal for financial institutions where confidentiality and regulatory compliance are crucial.
Blockchain and security
When building an enterprise blockchain application, it’s essential to have a comprehensive blockchain security strategy that uses cybersecurity frameworks, assurance services and best practices to reduce risks against attacks and fraud. This strategy should encompass key areas like identity and access management (IAM), ensuring only authorized users can access critical components, and utilize strong encryption techniques for data protection. In addition, adopting effective consensus mechanisms that are resistant to attacks is crucial for maintaining the integrity of the network.
Other important security imperatives include the following:
- Regularly audit and test smart contracts for vulnerabilities, as flaws in their code can lead to serious security breaches.
- Comply with industry regulations, such as GDPR or financial standards, using privacy-enhancing technologies like zero-knowledge proofs.
- Integrate secure messaging protocols to facilitate confidential communication within the blockchain-based network, ensuring that messages and transactions remain private and tamper-proof.
- Utilize continuous monitoring and a well-defined incident response plan to ensure that any security issues are detected and addressed promptly, minimizing the impact of potential threats.
The difference between blockchain and Bitcoin
Bitcoin is the first decentralized digital currency to enable peer-to-peer transactions without a central authority. It uses blockchain technology as its underlying infrastructure, acting as a distributed ledger that records and verifies all Bitcoin transactions.
As the most well-known cryptocurrency, Bitcoin plays a central role in the blockchain ecosystem, but it’s also part of a much larger and evolving market. The pricing in the Bitcoin and cryptocurrency space is highly volatile, with factors such as technological advancements, market sentiment, investor demand and regulatory changes playing a significant role.
Blockchain and AI
Combining blockchain and AI creates new opportunities for businesses across various industries. Using blockchain’s immutable ledger and decentralization, AI can improve data transparency and security, addressing challenges like explainable AI.
For example, in supply chain management, blockchain ensures the traceability and authenticity of products, while AI analyzes data to predict demand and optimize logistics. AI helps automate risk assessments in financial services, while blockchain secures transactions and ensures compliance.
Beyond these applications, the integration of blockchain and AI is also making significant strides in industries like healthcare. Healthcare providers are using AI to analyze patient data for personalized treatments and blockchain solutions to ensure the privacy and security of medical records. This convergence enhances trust, boosts efficiency and supports process automation, leading to faster, more reliable business operations across industries.
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Introduction to Web 3.0?
Have you ever pondered how the Internet works? And we’re not just talking about Web 2.0—today’s Internet of search engines, corporate websites, social media, and ultra-useful information sites like Encyclopædia Britannica—but tomorrow’s Internet. It’s called Web 3.0 or Web3, and it’s a blockchain-based Internet that uses decentralized technology to operate.
Web3 Internet is a technological innovation over Web 2.0—today’s Internet—because it gives digital control and privacy back to Internet users. Web3 visionaries see user empowerment and digital sovereignty as core values.
But note: Many of the applications and Web3 building blocks are still in their infancy. Some are more theoretical than actual.
Key Points
- Web3 is decentralized Internet that uses blockchain technology.
- Technological innovations built on Web3 may improve security and privacy.
- Web3 applications may transform all aspects of the financial system.
What is Web3?
Web3 Internet uses blockchain technology—the same technology that underpins Bitcoin and other cryptocurrencies—to make the decentralized Internet more secure and private. Web3 systems are technology protocols controlled by computer code to facilitate direct and secure communications among users, applications, and data. Blockchain technology, decentralized data storage, and peer-to-peer networking are the necessary components of a decentralized Internet.
Web3 advocates are excited about the potential of Web3 technology to make the Internet more user-centric. Web3 can potentially democratize financial systems by removing centralized decision-makers and geographic borders from the Internet.
Web 2.0 vs. Web 3.0 (and do you remember Web 1.0)?
Web2 is what you know as the Internet today—a social place that enables you to easily interact with content and people. If you’re old enough to remember the Internet before Amazon, YouTube, and iPhones, then you may remember that the first version of the Internet, Web1, was read-only.
Here’s how the Web3 cheerleaders see the Internet evolving from today’s Web2 in terms of data control, commercial applications, data security, and other features.
Data ownership. Web2 platforms like Google and Facebook own and control the data created by users who access their platforms. Web3 places ownership and control of data solely with Internet users, who can decide exactly how their data is used.
Monetization. Web2 platforms leverage their ownership of user data to make money by charging digital advertisers for access to targeted audiences. A Web3 protocol uses cryptocurrency to incentivize individual users everywhere to operate the platform. Web3 users can leverage the technology to monetize their products and services by transacting directly with other peers on the network.
Security. Have you ever been informed that your data was exposed in a security breach? Centralized Web2 servers can be vulnerable to malicious attacks. Fully decentralized networks offer the promise of greater safety.
Censorship resistance. How important is free speech? The centralized nature of a Web2 platform makes it possible to censor and restrict access to the platform’s content. Web3 Internet protocols resist censorship by enabling the decentralized generation and distribution of information.
Reliance on trust. Would you conduct business online using just any website? Centralized Web2 platforms need users to trust them to operate successfully. Web3 technology can support trustless systems—protocols that use blockchain technology to eliminate the need for faith in any counterparty.
Points of failure. Centralized Internet platforms create single points of failure—a Web2 platform that experiences serious technical problems can impact many people. Web3 systems are decentrally operated and—by design—have no single point of failure.
Eight examples of Web3 applications
Web3 applications—better known as decentralized applications or dApps—have the potential to transform the financial system and create new opportunities within a growing Web3 network.
The world already has many potentially useful decentralized protocols and apps. Here are eight examples that may move to the mainstream as Web3 picks up steam.
- Ethereum. Perhaps the best-known Web3 protocol, this decentralized platform supports a native cryptocurrency plus a vast ecosystem of decentralized apps. The Ethereum platform hosts most of the Web3 apps that exist today.
- Brave. Brave is a Web3-based browser that enables users to directly monetize their content consumption and creation. Users are rewarded for viewing ads and can be compensated directly for producing original content.
- Uniswap. This Ethereum-based protocol supports a decentralized exchange that aims to be a Web3 version of today’s stock and commodity exchanges. Governance of the Uniswap protocol is also decentralized, with full control distributed among UNI tokenholders.
- Aave. This Web3 lending and borrowing platform enables users to earn interest on deposits, plus borrow assets without requiring approval from centralized intermediaries.
- RealT. Real estate investors may be interested in RealT, a Web3 app that aims to tokenize real estate. RealT allows investors to earn rental income from fractional ownership shares in properties.
- Set protocol. Internet users can access the Set protocol to automate investing and rebalancing of crypto assets. The protocol uses Web3 tech to enable investors to predefine their investing rules and strategies. Perhaps, one day, the protocol could move from crypto assets to traditional asset classes.
- Nexus Mutual. Web3 technology can support decentralized insurance platforms, and Nexus Mutual is exactly that. The platform is focused on insuring crypto holdings and covering smart contract failures.
- InstaDApp. This Web3 banking portal aims to simplify access to multiple decentralized finance (DeFi) protocols. The dApp features portfolio management and debt refinancing tools.
Notably, Bitcoin is not generally considered a Web3 protocol. Bitcoin was designed by Satoshi Nakamoto as a store of value akin to digital gold. The Bitcoin network does not support advanced smart contract functionality or an ecosystem of dApps, limiting its use outside of blockchain-verified payments.
The bottom line
Imagine a digital world in which major tech companies don’t control your data or curate your online experiences. Mass adoption of Web3 may mark a paradigm shift in the modern Internet landscape, creating new opportunities for innovation, collaboration, and financial empowerment.
Although we’re still in the early stages of Web3 creation and adoption, there’s no denying the potential of emerging technology to—once again—give the economy an overhaul. Responsible investors would be wise to consider the many potential impacts of Web3, as it could become the future of all things financial.
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