Play By The Rules

Throughout the last few sessions, we established the fact that blockchain requires no centralized players or middlemen to perform its operations. But when it comes to transactions, the whole notion of “no third party” can be confusing. After all, how can we conduct a transaction without relying on anyone?

To answer the question, we have to look at the role of a middleman in a given transaction. What does he do?
Take the example of buying a pack of biscuits from your local shopkeeper. Here you rely on the shopkeeper for the transaction. What is his role in the transaction? To understand, we need to dissect the transaction elements. Apart from the players and the assets involved, the contract that the transaction abides by is just as important. Now, the contract is a set of rules. Every transaction, no matter the scale, abides by a contract, in other words, every transactional action holds a contract. The contract may not be a written one (as in the case of buying a biscuit), but it exists nonetheless. While getting a pack of cookies, you have to make sure that you provide the required amount of money, you have to get the item worth your cash and, if the balance is pending, you have to receive the proper amount. These are some of the rules that make up the contract for such a transaction. The role of the shopkeeper is to verify these rules and conduct the transaction by following the contract.

Now, imagine if we replace the shopkeeper with a vending machine. Do you think that the machine will uphold the contract?  The answer is yes. You see, when we substitute the vendor with a vending machine, we are removing the third-party vendor, in his place, we are keeping a machine that is capable of verifying the rules of the contract and conduct the transaction on its own. In this scenario, we removed the reliance on the vendor by replacing him with a vending machine.

Blockchain uses a similar approach. In a blockchain, we have something called a Smart Contract. A smart contract is just a computer program. Within this program, we give all the rules and logic required by the transaction. The smart contract can verify the conditions on its own, and if everything checks out, it can perform the logical actions associated with the transaction (hence the name).

You can run these smart contracts on top of blockchain networks and conduct transactions without the help of third parties. The smart contract takes the necessary information from the user, verifies them, and uses that information to execute the transaction.

With the help of smart contracts, blockchain helps you remove the reliance on third parties and help you create truly peer-to-peer applications.