Defining Smart Contracts and their role in Cryptocurrency’s Future

Bitcoin was created in 2009 as a revolution in currency and is now used by billions worldwide. Cryptocurrencies have grown since then and are now more than just a currency. Today, there are networks designed to use Cryptocurrencies, like Ethereum, which intend to change modern e-commerce. Ethereum was built on ideas ranging from smart contracts to blockchain ledgers with unlimited applications and unlimited uses.

Ethereum and the currency it uses called Ether secure the transactions of peer-to-peer and e-commerce which is disrupting and decentralizing many of the current business and personal transactions. For example, recent news headlines read about the Non-Fungible Token (NFT) craze and how artists could create significant value and returns on their creations. Some digital art is going for millions of dollars in the Ethereum secondary market and other metaverse markets designed to exchange cryptocurrencies for art or other artistic content. These markets are not a fad and are the future of the internet, and many coined this revolution as internet 3.0.

The future of the internet will constantly evolve, and there is good evidence that decentralized applications like smart contracts can replace many centralized monetary institutions like our Central banking system. Central banks control the money supply and, since 1913, have tried to create stability in commerce by increasing or decreasing the availability of credit. The issue here has been that the US stopped backing the currency with gold, making it a fiat currency. Currencies that are not backed by hard assets are easily manipulated. Cryptocurrencies inherently fix this issue and can alleviate the need for central banks and could, in theory, replace all commerce. As a result, transaction fees are considerably less for a decentralized application like Ethereum because the process eliminates intermediaries.

El Salvador has adopted Bitcoin as their nation’s currency, creating stability in their e-commerce. Still, the roses come with thorns, and civil unrest has broken out to protest the government’s decision. Unfortunately, many lack access to bitcoin as computers and internet connections are limited. Early adoption has aided and hindered this nation’s economy, and the future is uncertain for this tiny nation. Even with all these issues, the security of the cryptocurrency is well documented with El Salvador, and they might not be the last to adopt.

There are significant differences between Bitcoin and Ethereum, and it all starts with the cryptocurrency networks. Ethereum is networks run by thousands of computers across the globe running nodes (a program that assists in verifying transactions). The operating node is a costly process using time and energy in computations, and to incentivize the miners, the node system rewards the miner with Ether coin. Bitcoin is a complex cryptocurrency and needs to be mined using nodes, but there is no network for Bitcoin. Bitcoin needs networks like Coinbase to facilitate transactions. Ethereum is a network for transactions and uses Ether as their only cryptocurrency used in their networks. However, the transactions used by the Ethereum network are not limited to monetary transactions of goods and services.

The smart contracts invention is the Ethereum network’s most significant contribution to blockchain adoption. Here are some insights on smart contracts from IDX indices,

“The single largest difference between Bitcoin and Ethereum is the latter’s use of smart contracts. Smart contracts are programs that can be deployed on the Ethereum blockchain, allowing developers to build and deploy applications that run in a decentralized manner without concern for downtime or third-party interference. Ether (ETH), the unit of exchange on the Ethereum blockchain, is used to power these decentralized applications (DApps). The addition of smart contracts makes Ethereum a decentralized ledger and an operating system that allows developers to build and deploy applications that can solve specific use cases and challenges. This is where the smart, in smart contracts, comes into play, solving for the removal of inefficient and burdensome layers of authentication. Smart contracts, stated, are computer codes created to reflect an agreement between two or more parties. Because these contracts are self-executing, they do not require a third party to verify or document the exchange of value. Therefore, smart contracts allow for largely trustless transactions: those occurring without a centralized authority, legal arbiter, or third-party verification agent.” (IDX Indices 2021).

The smart contract makes Ethereum and Ether stand out and could be the defining factor for the internet 3.0 and the Metaverse. Facebook or Meta promotes and invests as much of their resources as possible in the 3.0 internet. Meta wants to be the social media default application in the next part of the internet. They believe that virtual reality (VR) plays a significant role. The digital virtual worlds are like the “Oasis” in “Ready Player One” film. All participants need to use VR equipment and live alternative virtual lives in the film.

Ethereum is the best-equipped cryptocurrency network to handle the Metaverse or “Oasis.” The winner here will be not the coin but the network, and more importantly, the participation by the majority. Ether will not need to be the only cryptocurrency being used. However, it will be the first smart contract used in the future Metaverse. Ethereum has a monopoly on smart contracts, which can continue barring changes in regulations.

Billions of dollars are being invested into the virtual worlds, now referred to as Metaverse. These new marketplaces and virtual social gatherings will need infrastructure and monetary policies, and Ethereum is currently the best network for these transactions. Investments in the Metaverse are concentrated to a few large investors, and this concentration of money being invested is starting to decrease the decentralized aspect of these networks. Corporate America should not be in control, and at a certain point, the regulators would have to intervene as they have in the past. The regulation changes are the most significant risk to this asset class, and each time congress holds hearings about this topic, the prices of cryptocurrencies decline.

The institutional investment community has funded this asset class and has created multiple investment vehicles. ETFs and Closed-end funds approved by the SEC are now being traded daily in the stock market (GBTC BITQ, BITO ETHE). In addition, funds are being created at a frantic pace and could create pricing support for cryptocurrencies as the demand for these assets increases and adoption continues.

Ethereum is more than a blockchain or a cryptocurrency and should be viewed as a digital commodity, but how this commodity will be used in the future is still unknown. Ethereum’s network is first to the game and is continuously evolving as the network, and the community is now establishing their uses for this technology.

Written by Gabriel Jones