Smart contracts are becoming increasingly more popular, as well as an important part of the blockchain. While their popularity is ever increasing, it is important for us to understand exactly what they are, what use we have out of smart contracts, and also how the idea has flourished in the first place.
Much long before bitcoin was even created, the term „Smart Contract“ was used by computer scientist Nick Szabo, in 1997. The idea of a smart contract is similar to the idea of the regular contract we are all familiar with.
We can think of smart contracts as entirely digital versions of contracts or, to be even more precise, smart contracts are tiny computer programs, stored inside of a blockchain.
What are smart contracts?
A smart contract is a digital contract that is stored on a blockchain. Smart contracts are self-executing and can be used to automate transactions or other processes.
Ethereum is one of the most popular platforms for developing smart contracts. Ethereum’s smart contracts are written in Solidity, a programming language designed specifically for smart contracts. Solana is another popular platform for developing smart contracts where smart contracts are written in Rust, a programming language with a focus on security.
Smart contracts have the potential to revolutionize the way businesses interact with each other and with their customers. Smart contracts can be used to automate many different types of transactions, from financial transactions to supply chain management.
By using smart contracts, businesses can streamline their operations and reduce the costs of manual processing. Smart contracts can also help businesses to reduce the risk of fraud and other types of errors.
Smart contracts can pretty much execute any contractual condition or function. They are Turing-complete, meaning that they use programming languages with conditional statements and conditional branching.
This means that these smart contracts can do whatever a regular computer program could do, if given enough time and computational power.
The beauty of smart contracts is that they are completely autonomous and decentralized. This means that once a smart contract is deployed on a blockchain, it will continue to run exactly as programmed, and there is no entity that can interfere with the smart contract’s code. This also means that smart contracts are not biased in any way, and they cannot be tampered with.
Another great thing about smart contracts is that they are very transparent. All the terms of the smart contract are written into its code, and all the data stored inside of a smart contract is public. This means that anyone can check whether or not a smart contract is functioning properly at any given time.
Smart contracts have many different uses. One of the most popular use cases for smart contracts is creating decentralized applications (dApps). dApps are basically apps that run on a blockchain.
How do smart contracts work?
A smart contract is stored on a blockchain and is triggered by events. When an event occurs, the smart contract is executed and the terms of the contract are enforced.
For example, let’s say you have a smart contract that defines the terms of a loan. The contract stipulates that the loan must be repaid within two years. If the borrower fails to repay the loan within the specified time frame, the contract will automatically initiate a transaction to sell the collateral and repay the lenders.
Smart contracts are immutable, meaning that once they are created, they cannot be changed. This ensures that the terms of the contract will be enforced no matter what. Smart contracts can be used for a variety of applications, such as financial contracts, voting systems, and supply chain management.
We are all familiar with the concept of setting the funding goal for a project via a third party and collecting the money from people who believe in the idea on which the funding is based.
There is an ever-increasing number of third parties that are being created to fulfill this aim, and the idea explained. Any third party used is essentially a platform that needs to be trusted by both the project creators and the financial supporters, as it is what connects them and sits in between.
Since smart contracts are stored inside of blockchain, all of the funds get completely and fairly distributed, depending on the outcome. The main benefit of this is that nobody is in control of the funds, and no third party is to be, or not to be trusted.
Why use smart contracts?
Smart contracts offer a number of advantages over traditional contracts. They are tamper-proof, transparent, and can be executed automatically. This makes them well-suited for use in a variety of applications, such as digital asset management, supply chain management, and voting.
Smart contracts are still in their early stages of development. As the technology matures, it is expected that more businesses will begin to use smart contracts to automate their operations.
Some of the advantages of using smart contracts include:
Once a smart contract is deployed on a blockchain, it cannot be modified. This makes them more secure than traditional contracts, which can be altered or deleted.
Smart contracts are visible to all parties on the network. This transparency helps to build trust between the parties involved.
Smart contracts can be programmed to execute automatically when certain conditions are met. This eliminates the need for manual intervention and reduces the chances of errors.
Smart contracts have the potential to streamline business operations and reduce costs. As the technology develops, we can expect to see more businesses using smart contracts to automate their processes.
What are the challenges of smart contracts?
Smart contracts are still in their early stages of development and adoption. There are challenges around scalability, usability, and security.
The current generation of smart contracts is not able to handle large amounts of data or transactions. This limits their use cases to small, simple contracts.
Creating and deploying a smart contract requires a certain level of technical expertise. This can be a barrier to adoption for non-technical users.
There have been a number of high-profile hacks of smart contracts. This is due to the fact that they are immutable, meaning that once a contract is deployed, it cannot be changed. This makes it difficult to fix vulnerabilities.
Despite these challenges, smart contracts have a lot of potential. They offer a new way to create and enforce contracts that is more secure and efficient than traditional methods.
As the technology matures, we will likely see more use cases for smart contracts.
Why should smart contracts be trusted?
As already mentioned one of the essential ideas of smart contracts, which is also their greatest advantage, is that once the smart contract is created, it cannot be changed.
This means that nobody has the ability to alter the contract, which guarantees its reliability.
Another great feature, and one more reason to trust smart contracts, is that they are distributed.
This means that the output of the contract needs to be validated by network.
For example using “funding project contract”, nobody can decide that the project the funds are invested towards is completed, if others disagree, knowing that the goal has not been met. Nobody can force the funds to be released, because others involved have the ability to recognize it and mark it as invalid. Changing, altering, messing with, or getting in the way of smart contracts is guaranteed to be impossible.
Smart contracts, or self-executing contracts that are stored on a blockchain, have the potential to streamline business operations and reduce costs.
The current generation of smart contracts is not able to handle large amounts of data or transactions, but as technology advances we can expect more use cases for them in the future.
Despite the challenges, smart contracts offer a new way to create and enforce contracts that is more secure and efficient than traditional methods.