Blockchain is helpful for more than just managing digital currency. Decentralized applications, or smart contracts, also depend on distributed ledgers. In this article, data-driven investor Daniel Calugar outlines what blockchain is and how it can help your business.
A discussion about decentralized applications (dapps) should start with a primer about blockchain. With many innovative and disruptive technologies – AI, for example – the early stages of general adoption bring a flood of misinformation. Unfortunately, it is often promulgated by well-meaning marketing folks that lack more than a surface-level understanding of the topic; inaccurate descriptions and conflated terms muddy the waters.
Blockchain is based on the idea of a distributed ledger – a digital system that records transactions. The details of a transaction are simultaneously recorded at numerous places. There is no central data storage. Instead, the database exists among many participants across different geographical locations.
One of the most misunderstood aspects of the blockchain is its relationship to Bitcoin and other cryptocurrencies. Many people appear to see blockchain and cryptocurrency as the same thing. They are not.
One of the best ways to understand, or help others understand, the relationship between blockchain and cryptocurrency is to apply the parallels between a computer operating system and a piece of computer software. Blockchain is the technology that makes cryptocurrency possible, just like your computer’s OS makes running MS Word possible, but you wouldn’t say that running MS Word is the only thing your computer can do – let’s hope.
Dapps (sometimes called smart contracts) are digital applications or programs made feasible by blockchain technology. Dapps run on a distributed computing system; that’s not new technology. What makes dapps unique is they run on a blockchain network in a public open-source, decentralized environment. Thus, they are free from control and interference by any single authority.
The smart contract moniker for a dapp comes from the idea that these programs can prevent a transaction from being fully executed until both parties have agreed to the terms and conditions – thus, they offer more protection than a simple digital transaction.
You might say that dapps and cryptocurrency are cousins. This kinship is because they both require the decentralized and autonomous aspects of blockchain’s distributed ledger to work securely and effectively. In the case of Ether, the digital currency of the Ethereum community, this relationship is even closer and interdependent.
Ethereum is the community-built technology behind the cryptocurrency ether (ETH). ETH is a tradable digital token, global money, and the currency of Ethereum dapps. ETH is similar to Bitcoin in that you can invest in it, trade it, and buy stuff with it. Still, more than that, you can store computer code that you can use to power tamper-proof decentralized financial contracts and applications – dapps that run without any downtime, fraud, control, or interference from a third party.
While they are both digital currencies, Bitcoin was created as an alternative to national currencies and aspires to be a medium of exchange and a store of value. Ethereum, on the other hand, is intended as a platform to facilitate permanent, programmatic contracts and applications using ETH.
The number of ETH-powered smart contracts that businesses can use is growing every day. They fall mainly into the categories of finance, art and collectibles, gaming, and technology. Popular dapps for business include services such as lending, borrowing, earning interest, and facilitating payments with no personal data required.