Is blockchain technology all about intelligent contracts?

Finally understandable: Everything you need to know about the blockchain

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Opinions on blockchain technology couldn't be more different: Many claim that it will fundamentally change our economy and society due to its decentralized infrastructure. For others, however, technology is just another buzzword and hype. But what exactly is and does the blockchain actually do?

The blockchain belongs to all of us

Think of the blockchain as a large, digital database that transparently stores logs. It is basically nothing more than an infinitely long chain of blocks or transactions that makes any changes visible. All computers in the network save all information and its changes on the blockchain.

In principle it works like an Apple Cloud or Google Drive - only it is decentralized. This means that the database is not held by one company, but is distributed over many computers. Like the internet, the blockchain is managed by people all over the world. You too can become part of a blockchain network with your computer and the appropriate software. Every participant has the same access rights without asking for permission.

If a “block” is full of transactions, it is sealed with the so-called hash value, a mathematical checksum, and saved. A new block will then open. This is how a chain is created - the blockchain.

The data is not just about money transfer transactions. Also who voted which party in elections, who bought which house or shares and much more can be saved in this decentralized technology.

There is no need for middlemen

To transfer money, you usually go to the bank or use online booking. In order to protect yourself, you can get advice from the insurance company and in order to conclude contracts, you are always faced with a bureaucratic hurdle. The blockchain could replace all these middlemen or intermediaries.

The “peer-to-peer” principle of blockchain technology is one of its greatest advantages. The point is that transactions are processed digitally and with virtual currencies without banks or other intermediaries.

The cryptocurrency is the best-known application example of the blockchain. This is an exclusively digital currency. While banks are still responsible for ensuring that our money gets from A to B, the money transfer on the blockchain takes place completely without a third party. How does this work?

You download a digital wallet, the wallet app for a cryptocurrency - let's say Bitcoin. You then specify how many Bitcoins you want to transfer. As soon as this has happened, the so-called blockchain miners come into play: As auditors - the accountants of the blockchain, so to speak - they are responsible for generating a "block" and assigning the hash value.

To do this, the miners have to solve a mathematical puzzle. Whoever has the solution first, seals the block and saves it so that it is visible and unchangeable for all other blockchain participants. As a reward, the miner receives a fee in the form of cryptocurrency. So the miners check whether your transaction is legitimate and whether your account is covered at all. The whole process only takes a few minutes. This process is also called proof-of-stake.

At the end, the recipient simply changes the money into normal, physical money. Central authorities such as the bank, credit card provider or PayPal become superfluous.

Forgery-proof transactions through blockchain

One of the greatest advantages of the technology is that it is tamper-proof. Due to the decentralized infrastructure, each participant has a kind of copy of the protocol. The respective hash value of a block is copied to the next block.

A manipulation would be immediately recognizable because the hash values ​​no longer match. Only when a hacker hijacks more than half of the network would the blockchain be in danger. Since there is no central authority, nobody dictates what is right or wrong. Instead, the majority decides. A hacker would have to manipulate at least half of all participating computer networks of the countless blockchain miners in order to falsify data or steal information.

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This is also referred to as a consensus procedure. This protects the blockchain from manipulation and prevents a participant from illegitimately carrying out a transaction multiple times.

Smart contracts are revolutionizing analog contracts

As mentioned earlier, the blockchain is not just about transactions in the form of simple transfers. So-called smart contracts, ie “intelligent contracts”, represent a completely new form of agreement. What is special: They follow the “if-then” principle. They automatically perform certain actions when certain, previously defined conditions occur. This makes human intermediaries superfluous.

An example: Imagine you buy a car on financing. If the purchase takes place via blockchain, a digital car key will be activated for you as soon as you have transferred the purchase price to the seller. If you miss an installment payment, the car automatically locks itself: Smart contracts are executed exactly as they are previously defined. Hundreds of blockchain miners ensure that the transaction is verified. The Ethereum blockchain, for example, offers such smart contracts.

Blockchain turns the economy and society upside down

The decentralized infrastructure, the associated security against manipulation and the smart contracts are the components of the blockchain that make it revolutionary compared to all previous technologies.

Nowadays, many people still only associate blockchain technology with cryptocurrencies. It is used in a wide variety of areas. For example, there are start-ups that have developed electronic patient files on the blockchain. The data is recorded in one place and can easily be shared between hospitals, medical practices or pharmacies if necessary. On the other hand, logisticians are already using the blockchain for supply chains, for example to make the route of certain products from production to the supermarket transparent and traceable. This ensures the quality of the products.

A technology like blockchain that verifies transactions without the need for a third party has never existed before.