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Crypto-currencies, block chain and distributed ledgers.

Nigel Morris-Cotterill

This ultra-simplified explanation clarifies the absolute basics of a subject that has become shrouded in myth and mystery.

The blockchain, crypto-currencies (or cryptocurrencies) like bitcoin, distributed ledgers and smart contracts are, actually, stuff you already know..

Smart contracts

The final aspect of this area is termed "smart contracts." This sounds impressive but, again, it's not really.

Smart Contracts are the cultural, but not technical, successor to trusted third parties which were the big thing that everyone talked about when internet payments were in their infancy. TTPs, as they were known, were simply stakeholders. A purchaser sent money to the TTP who held it until goods were delivered and then the payment was released to the vendor. Knowledgeable readers will recognise that as the essence of a letter of credit, in which a bank would be the TTP, and the use of letters of credit is centuries old. At their heart, "smart contracts" are automated versions of that. Users of some on-line shopping services see it at work all the time, as a simple data processing task not a smart contract and that's because it's essentially a very simple system.

Purchaser places an order and makes a deposit with the on-line company > the on-line company tells the vendor there is an order and how to satisfy it > the vendor despatches the goods and obtains a tracking number which it passes onto the on-line company > the goods are delivered > the purchaser signs for them > the delivery company passes that evidence of delivery to the on-line company > the on-line company pays the vendor.

Yes, the smart contract can have many conditions on both sides and yes the data may come from many sources but ultimately it's just a series of "if-then-else" loops and, honestly, that's not very clever at all. The interesting thing about smart-contracts is that they can be integrated into the blockchain and are therefore can be confirmed by third parties. This can be especially useful in relation to, say, tracing the authenticity or date of manufacture of pharmaceuticals. The data can show, for example, that a particular batch number has been delivered to country A. If it turns up in country B, that's a potential problem. What it cannot do, however, is establish if the product has been stored properly or intercepted and tampered with: therefore while authenticity of the shipment is reasonably secure, quality and authenticity of the product cannot be verified by this type of record.