Blockchain, Cryptocurrency,Smart Contracts, and How They are Related

by | Jul 17, 2018 | Benefit Plan Audits

The overnight ascension of cryptocurrencies has thrust an entirely new vocabulary onto the business world.  Blockchain this, cryptocurrency that. When coupled with phrases such as “decentralized applications” and “smart contracts”, it can be a lot to digest — and a bit confusing.

Of course, all of these things matter greatly to the business world. With that in mind, here’s a beginner’s guide to smart contracts and several considerations for your cryptocurrency strategy.

What is blockchain?
A blockchain is a decentralized, append only ledger that has no master copy. The copies of the ledger are stored and updated across various nodes (computers) through cryptographically secured transactions in a network that can be private or public. Every participant in the network has simultaneous access to view this information. These ledgers are maintained with ongoing updates that digitally sign the transaction giving irrefutable proof of existence. The decentralization of the ledger also ensures that a recorded transaction cannot be reversed due to hacking/altering the ledger since it is maintained on numerous nodes. Therefore, every transaction is linked to the previous transaction, hence the term blockchain.

What is cryptocurrency?
To begin, note that blockchain is not and does not require cryptocurrency. A cryptocurrency is just a digital currency that uses cryptography to ensure that it cannot be counterfeited. Cryptocurrency is merely one application of crypto technology, allowing the transfer of payments via transactions recorded on a blockchain ledger and Bitcoin is one of the more popular forms of cryptocurrencies in today’s market.

What is a smart contract?
A smart contract helps you exchange money, property, shares, or anything of value in a transparent, conflict-free way using blockchain technology, while avoiding the services of a middleman. For example, if you were to enter into a smart contract, the currency or assets for the transaction are transferred into a program and the program determines if the necessary conditions have been met per the contract. If the conditions have been met, the currency or assets will be transferred to the appropriate party, or will be immediately refunded back otherwise. The decentralized ledger using Blockchain technology will store and replicate the document making it unchangeable.

While cryptocurrency was the first form of blockchain technology that made waves in recent headlines, the potential usages of blockchain technology are endless. From currencies, to contracts to applications, there is much more to be explored in the world of blockchain computing using cryptography – this is just a glimpse of the potential this technology holds.

Want to learn more?  Check out our article, Cryptocurrency Tax Essentials.

Mr. Tony Mathew is an audit senior on our Employee Benefit Plan Assurance team and is involved in the overall performance of the fieldwork. He has served on numerous employee defined benefit plan audits, defined contribution (savings, 401(k)) plan audits, and health and wellness plan audits sponsored by publicly-traded and privately owned companies. Connect with Tony via email or on LinkedIn.

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