Notes On Blockchains

Decentralization has no distinguished leader. Blockchains offer ways for data to be verified via consensus. Each transaction involves an agreement among the group of computers on the network. The breakthrough is that it requires no human oversight to validate any activity. Once the rules are established, it gets executed by all the computers that form the network and it becomes self-governing. It’s a new form of computing, built by independent computers (nodes) that create an irreversible ledger (blockchain). Every transaction on the blockchain is agreed upon by participants and the rules can’t change unless the network agrees.

Smart contracts are the computer code that runs on the nodes of a blockchain. They carry digital value that can be stored in software and moved when triggered by a specific action. IF [this happens] THEN [do that]. The rules of a smart contract are written and deployed among blockchain users. The software is open-sourced for any user to clone, compile and run. Once deployed to a blockchain, the rules of the contract are transparently executed by the computers in the network. This guarantees that the logic of the smart contract isn’t altered by a single entity. Change must be agreed upon by user consensus.

Decentralization comes with many pros but the main advantage is that it offers no third-party incentives. The distributed record of truth autonomously gets verified and updated by smart contracts. Each transaction is settled and logically agreed upon, which makes it difficult to dispute. The concept of smart contracts have been around before the invention of blockchains. They were never practically implemented until decentralized infrastructure saw the need for it. The relatively new invention of blockchains have created many experimental use cases for smart contracts like Bitcoin, defi, NFTs, and DAOs.

General objectives of smart contracts are to settle contractual agreements between two users, while limiting malicious activity and minimizing the need for trusted intermediaries. When pre-configured conditions are met between two users in a smart contract, their agreement can be automatically settled and payments are directly sent to their wallets.

Although smart contracts will need to evolve before they become mainstream for production use, they have the potential to revolutionize the reward and incentive structures that shapes how parties interact in the future. While existing structures like banking is built on this new technology, the true impact of smart contracts will come from new paradigms we have not yet envisioned.

Cryptocurrencies are the first practical uses of blockchains and smart contracts. Bitcoin is the first cryptocurrecy created in 2009 as a response to economic interventions by the U.S. Federal Reserve during the 2008 housing market crisis. There’s been many cryptocurrencies created since then. Some useful, the rest not so much. Tokens today are primarily used for currency, utility, or security. Like blockchains, smart contracts and decentralization, tokenomics is another idea that still needs to evolve.

Of roughly 750 currencies that have existed since 1700, only about 20% remain, and all of them have been devalued. The US dollar, along with other state-held currencies face similar problems. Experimenting with newer forms of value is how we find better economic solutions. In a free market, the government’s fiat dollar should compete with alternate currencies for the benefit of consumers, savers, and investors.

Many blockchain users today are leveraging self-funding tools to build a crypto-native economy on the internet (web 3). Deployments of smart contracts involve token incentives to adopt certain experiments. All economic activity generated through tokens are logically executed by smart contracts and autonomously settled by blockchains. We have yet to see how this decentralized experiment plays out.

Trust in two parties,
Should never include a third,
Be decentralized.

-rushil