Since the beginning, cryptocurrency has introduced several game-changing concepts. One of the most impactful of those is smart contracts. These are digital “agreements” that have the power to totally transform industries around the world by automating processes, reducing costs and eliminating the need for a “middle man”.
This all sounds great, but what are they? How do they work? Why do they matter?
In todays blog we will dive in head first to everything about smart contracts.
Smart Contracts?
A smart contract is simply an agreement that is “self-executing”. All the terms and conditions of the contract and written straight into the code of the contract.
Smart contracts all run on the blockchain, ensuring security and transparency for the users. They will automatically be executed once a set of pre-determined conditions have been met. By doing this, they eliminate the need for a third party, such as a bank or a solicitor
The idea of a smart contract was first bought about by a computer scientist called Nick Szabo in 1990. However, nothing came of them until the launch of Ethereum in 2015. Ethereum designed and launched a blockchain platform designed for the purpose of executing these smart contracts and allowing users to build decentralised applications (dApps).
Okay, but how do they work?
Smart contracts are not as complicated as they sound. They are built around a very simple but very powerful principle; If-Then.
This means that once a pre-agreed condition or conditions are met, a set of actions is then triggered. Sound simple enough? Okay, then let me explain the steps of a smart contract;
– The agreement: All parties involved in the smart contract have to agree to the terms of the contract. These terms are then coded into the contract, using a programming language such as Solidity (For use on Ethereum) or Rust (For use on Solana).
– Sending it to the blockchain: Once the above step has been completed, the contract is deployed onto the blockchain. Once this has taken place, the contract is “immutable, meaning that it can no longer be altered in any way by any of the parties involved in its creation.
– Executing and verifying the contract: Once the conditions laid out in the contract have been fulfilled, such as a payment being received of a delivery being confirmed, the contract will execute automatically.
– Blockchain records: Every transaction executed by a smart contract is recorded on the blockchain, allowing all parties to view the process and completion of the contract.
– Pass or fail: If all of the conditions are fulfilled, the contract is then considered to have been completed. If the conditions of the contract have not been fulfilled, the contract will remain inactive until the conditions are met.
What could smart contracts be used for?
What once started out as an idea has quickly become a reality and is already changing the way contracts are fulfilled today.
These are the key areas that smart contracts are already making an impact;
– Finance and banking: Smart contracts are enabling lending and borrowing of assets without the need for a third party. This allows all users to save money without having to pay for a solicitor or fees to a bank for completing and monitoring the exchange of funds.
– Paying for goods: Payments are now able to be released to a supply as soon as a delivery has been completed without the need for anyone to manually check a delivery or process a payment.
– Renting & leasing: Smart contracts can be used to generate rental agreements and ensure that all parties involved have what they need, when they need it and are paying the correct amount on time.
What are the downsides to smart contracts?
Despite having many benefits, smart contracts are not all sunshine and roses, at least not yet anyway. There are some serious limitations are the moment, these include;
– Coding Vulnerabilities: Smart contracts are only as good as the person who writes or “codes” them. Like all computer software, they are open to having bugs or even worse, having someone writing them who doesn’t have the best intentions of the user. An example of this would be the DAO hack in 2016.
– Legal Issues: Smart contracts all operate in a decentralised environment. This environment is still not completely regulated and Governments across the world are still trying to figure out the best way to govern their use.
– They are irreversible: Once a smart contract is added to the blockchain, neither party can alter or remove the contract. If there is an error in the contract, or someone changes part of the contract it has to be completely redone. Unfortunately, at this time this can prove to be costly.
Crypto Analyst‘s Final Thoughts.
Smart contracts have been and will continue to reshape the way agreements and transactions take place. They can provide trust, be executed automatically and efficiently. While there are issues that they need to overcome, the benefits that they offer makes it worth keeping a very close eye on the space.
As the adoption and general popularity of cryptocurrency grows, smart contracts are undoubtedly going to grow with it.
Whether they are being used in finance, property or gaming, smart contracts are here to stay and are looking to lead the world into a more decentralised, transparent place.