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Ethereum is a blockchain-based platform that executes smart contracts. It is a public distributed ledger that hosts transactions and essentially offers distributed ledger technology as a service. The platform also allows the transfer of value using digital currency (a token called ether). The programmable transaction functionality of Ethereum allows the platform to perform the execution of peer-to-peer or smart contracts. This article explores the Ethereum platform, smart contracts and Solidity.

Accessing Ethereum

Any person in the public can access the Ethereum Network by paying the open network for computation power. Computation power is key in a public distributed ledger to show consensus and verify every transaction. Ether, as mentioned above, is the value token of the Ethereum blockchain. As a cryptocurrency, it is traded between users and also used to pay for fees enforced by the network.

Ethereum can also be implemented on private networks, where the administrator of the private network approves participants. Currently, JP Morgan Chase, IBM and Microsoft have developed a custom platform using Ethereum. As it is a public distributed ledger, there is no central owner, and the public maintains it. Identical copies of the distributed ledger are accessible to everyone in the network.

At the time of writing this article, a digital, decentralised autonomous organisation called DAO was hacked. The DAO is a combination of smart contracts and distributed ledger technology using the Ethereum blockchain. The hacking incident highlights the potential vulnerability of the blockchain, particularly its attraction having raised the largest crowdfunding campaign in history.

Smart Contracts and Solidity

The Ethereum public blockchain uses a specific programming language called Solidity. Solidity was developed as a computing language, based on JavaScript, to run on the Ethereum Virtual Machine (EVM). Essentially, Solidity developers can write smart contracts that self-enforce and self-execute once certain terms are met. A real-life example of a smart contract is a vending machine or parking ticket machine. Once the user makes a selection and pays, the user receives their good. Here, the agreement between the user and the machine can be precisely defined and automatically executed without any ambiguity.

While Ethereum can improve efficiency and automate a number of processes, it also has potential risks. As the Ethereum public blockchain is ultimately decentralised, there is no check and balance on the execution of smart contracts. This could mean that if a developer makes a programming mistake, the machine will still run the program and execute the contract if the terms are met.

For complex financial transactions with numerous parties, this could have severe consequences if a script is automatically executed despite an error in the code. Developers, commercial entities and administrators of private networks can minimise this risk by authenticating large transactions, or transactions involving new users.

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Distributed ledger technology will continue to shake up the financial industries. To prepare for the transactions of tomorrow, banks and financial institutions should look to see how they can adopt these new models and see where the opportunities are. If you have any questions, get in touch on 1300 544 755 or tag us on Twitter @legalvision_au and let us know

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