The next development exemplified in the second era was a blockchain framework called Ethereum that led to “Smart Contracts”.

A bit of History

In December 2013, a man named Vitalik Buterin released a white paper on what would turn into the “Ethereum venture”- a blockchain platform with the ability to build decentralized applications. Ethereum is a blockchain based distributed computing, public, open-source stage highlighting smart contract facility.

Vitalik Buterin speaking at Disrupt

Vitalik was a noticeable Bitcoin lover for quite a long while and was a prime supporter of the Bitcoin magazine in 2012. He tried to update the original Bitcoin protocol and failed to gain agreement within the Bitcoin community, afterward he gathered a team of programmers to develop a completely new blockchain protocol featuring ‘Smart contracts’ that would allow programmers to build scripts into the blockchain which would act as contractual agreement and execute when the mentioned conditions are met. He named this new blockchain Ethereum.

So this was the birth story of Ethereum..!!

What is Smart Contract?

Smart contract is a piece of code which is stored on the blockchain network. Anything of significant worth, similar to cash, property or shares can be exchanged with the help of smart contracts without a struggle, in a transparent way while avoiding the services of a middleman. It defines the conditions to which all parties using the contract would agree, so certain actions are executed if the required conditions are met. A smart contract is saved on each computer on the network and all of them must execute it to get the same result. In this way, users can be sure that the outcome is correct.

Smart contracts are gaining popularity in the e-commerce industry. Every minute change and detail is documented within the blockchain. In other words, it allows everything to be recorded during the transactional process and tampering of the data is extremely unlikely making it safe.


Let us try to understand Smart contracts in detail by using an example

Let us say Person X wants to ship a truck full of goods to Person Y. Person Z is the trucker who would be carrying the truck full of goods to Person Y. Person X may trust Person Y, but not the trucker. On the contrary, even the trucker may not trust the sender (Person X), owing to the fear of not getting paid.

Person X would then sign an agreement with the trucker that he would process the payment only after the goods are received by Person Y. Such a process would usually involve a third party wherein legal papers and contracts are signed, printed and scanned.

Using smart contracts, this can be made simpler and the rules can be added in the code. Person X can use Smart contracts to sign an agreement with the trucker- where the program would mention a code wherein the payment would not be processed till the delivery is confirmed by Person Y Once the delivery is confirmed, the payment would be automatically triggered and processed by the smart contract. This can further be modified by adding a GPS tracker attached to the truck, which would eliminate the need for Person Y to confirm in this entire process and the payment can be processed once the stated conditions are met.

To use a smart contract on the Ethereum blockchain, mini payments of Ether, the cryptocurrency for Ethereum, were required. Since smart contracts are stored on the Ethereum blockchain, anyone can access or inspect the contract for bugs or irregularities since its contents are public. Additionally, no one can access the funds on the smart contracts, not even the developers.

Using this innovation of smart contracts in the blockchain system. Ethereum developers built small computer programs directly into blockchain that allowed financial instruments, like loans or bonds, to be represented, rather than only the cash-like tokens of bitcoin. The Ethereum smart contract platform has a market capitalization of billions of dollars and has hundreds of projects heading towards the market.