Ethereum and smart contracts. What do they bring?

3 min. reading
Ethereum / 1 June, 2021

Edgar Mondragón Tenorio Journalist

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What is Ethereum?

Vitalik Buterin designed the Ethereum platform based on blockchain technology, which means that it is also an open source and decentralized ledger just like Bitcoin, but with the intention of going beyond what the original cryptocurrency has established.

The purpose of Ethereum is to create a network in which different applications can be developed based on blockchain technology, but, above all, to serve as a basis for the generation of so-called smart contracts.

In addition, through the blockchain, it provides the advantages of decentralization, generating a network of thousands of nodes (miners) that will have the same information and validate each transaction.

This open-source information is immutable, which means that it cannot be altered, nor does it require validation by public or private financial entities.

Cryptocurrencies: benefits and risks of virtual currencies

2017 has been the year of cryptocurrencies: More than 300 new virtual currencies have been created. Bringing their total to over 900. In other words, the number of virtual currencies in the world more than triples the number of conventional, state-issued currencies, which according to the UN currently stand at 180.

Smart contracts

Smart contracts are the evolution of traditional contracts, but with the basis of blockchain technology and the backing of the Ethereum network, which is dedicated to achieving an ecosystem of decentralized finance through these contracts.

To explain it a little more simply, let’s imagine a coffee vending machine, which within the process of preparing coffee has several other implicit processes such as, the selection of the requested blend and, for that, the selection of the ingredients to prepare that blend.

This process is carried out automatically, however, it depends on human intervention for its maintenance and replenishment.

Now let us think that all these processes are detailed within an intelligent contract, thanks to which the machine will now not only prepare the different coffee blends. It will be able to review its own stock, generate the purchase order for the supplies it needs, and even reject them if they are not of the quality or brand that it has requested, and request its own maintenance.

In the same way, smart contracts, by having the specifications of the necessary requirements for the transactions, can validate these conditions for the realization of the deal for which they are designed without further human intervention.

Another advantage of these contracts is that, in addition to providing the security of transaction validation, they seek to reduce the time and costs involved in their physical form.

How effective are smart contracts?

The adoption of blockchain technology is increasing every day, and among its most popular uses is, precisely, the generation of smart contracts. One of the first cases in Latin America of the use of a smart contract occurred in Mexico through an important tuna company in this country.

Thanks to the implementation of the smart contract, supported by blockchain technology and the Ethereum network, an export agreement from Mexico to Spain, which under normal conditions would have taken up to ten days, was negotiated and signed in just two and a half hours.

Among the most common uses today of these smart contracts are, for example, voting for a publication in a forum, or even more complex as establishing guarantees for loans and futures contracts. Also setting payment priorities in a structured note.

The challenge

Although the Ethereum network has been around for a considerable time, from 2015 to date, the gradual adoption of blockchain technology has meant that these contracts are still in an exploratory phase and still being refined.

At the same time, Ethereum also continues to develop, the Ether token (ETH) continues to appreciate and maintains second place only to Bitcoin, in market capitalization.

Many like Buterin are determined to change the face of finance and go about building the path to decentralized finance. Ethereum is the pioneer and the foundation to achieve this purpose, smart contracts are just the first step.

 

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