June 29, 2021
What Are Smart Contracts?
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What Are Smart Contracts? A Beginners’ Guide

In order to become familiar with smart contracts, we start with an example. Imagine that you own a house and intended to sell it. For this purpose, you need to contact an agent in order to do all the paperwork. In fact, the process of doing paperwork, communication with different people and sectors are too complicated for the owner to do. In addition, it would be a risky process. As a result, most of the sellers refer to an agent to do paperwork, marketing and finally close the deal for them. In some cases, also the parties cannot trust each other, so the buyer pays the money to the agent, who plays the role as intermediate. The agency will charge the seller by taking some commission for his Inter-mediation. So, it would be costly to sell a house for the owners. Here is where smart contracts can play a significant role. In this article we are going to talk about what are smart contracts in cryptocurrency world?

 

Smart Contracts

Smart contracts have the potential to revolutionize the entire industry. In fact, they make the process much easier and simpler. The main advantage of smart contracts is that they solve the trust issue. The reason is that they work on an ‘If-Then’ principle.

Remember the example we mentioned above. In that case the ownership of the house will transfer to the buyer as long as they sent the agreed amount of money to the system. In fact, the system will hold both the ownership of the house and the money. Once, both parties met the terms mentioned in smart contract, the ownership of the house will be transferred to the buyer and the money will be sent to the seller. As a result, the process doesn’t require any third-party or intermediary.

In other words, all the functions, which the real estate agent does is pre-programmed into a smart contract. As a result, both parties can save significant amount of money.

What we mentioned above is just one example of potential uses of smart contracts. In fact, they are capable of exchanging property, money and anything else, which has value. The smart contracts eliminate the middle-men, provide the transparency and build trust between parties. In fact, all the required terms pre-programmed in a smart contract. In addition, all the information and data will be recorded in a blockchain.

 

How do smart contracts work?

In simple words, smart contracts work similar to vending machines. For this purpose, you just simply drop a certain amount of cryptocurrency, which is required for the transaction into the smart contract. After that, the smart contract will automatically execute your transaction. In fact, the transaction could be anything. It can be transferring a house ownership or whatever else. It’s notable that all the rules and terms are pre-defined by smart contracts and it will enforce them at the exact time.

 

Interdependence

Not only a smart contract can perform on its own, but also it can execute along with any number of other smart contracts. For example, in order to have successful completion of one particular smart contract, it can activate the start of another contract. As a result, a whole organization and system can run completely on smart contracts. In fact, it already implemented in many cryptocurrency systems. In those networks, all the terms and laws are pre-defined. As a result, the network can function independently and autonomously.

 

Integral parts of smart contracts

Basically, there are three integral parts, which also called objects to every smart contract.

The first one is signatories. It means that the parties who involved in the contract agreeing or disagreeing with the terms of the agreement by using digital signatures.

The second one is the subject of agreement. In fact, it could be an object, which exists within the smart contract’s environment.

The last one is that any smart contract has to consist specific terms. Those terms have to be described mathematically as well as using programming language, which is suitable for the particular smart contract’s environment. It has to be consisted of all rewards, rules and penalties associated with the said terms.

 

Environment

Smart contracts require to have a specific suitable environment in order to function properly.

The first condition is that the environment should support the use of public-key cryptography. In fact, this feature enables users to sign off for the transaction using their own key. This key generated specially and uniquely using cryptographic codes. The majority of cryptocurrencies are using the exact same system.

The second is that they need a decentralized and open database. For this purpose, all the parties involved in the contract can fully trust as well as being fully automated. Furthermore, the whole environment need to be decentralized for the smart contract in order to be implemented. For example, the Ethereum blockchain is the perfect environment for smart contracts.

The last one is that the source of digital data, which is used by the smart contract need to be completely reliable. As a result, it requires to use SSL security certificates as well as HTTPS and other secure-connection protocols, which are already use with most of the modern software.

 

What will smart contracts give you?

 

Autonomy

Smart contracts eliminate the third-parties. It means that you will have the full control of the agreement.

 

Trust

There is no chance that someone can steal your data and documents. Because, they are encrypted and securely stored on blockchain. In addition, you will not have any trust issue anymore. In fact, the smart contracts are unbiased system, replace trust.

 

Savings

Advisors, estate agents, assistance, notaries and many other third-parties and intermediaries will be eliminated. As a result, you do not need to spend money on them anymore.

 

Safety

Basically, smart contracts are extremely hard to be hacked. In fact, they are protected with complex cryptography, which will keep your document and data safe.

 

Efficiency

You will save a lot of time by using smart contracts. You will not need to do the process manually anymore because everything happens automatically. As a result, you will save significant amount of time.

 

Who created and who uses smart contract?

Nick Szabo was the first person who created smart contracts in 1996. In fact, he was a computer scientist and cryptographer, who published several versions of smart contracts. However, the smart contracts were not implemented until 2009. In fact, Bitcoin was the first cryptocurrency, which provided a suitable environment for smart contracts.

Nick Szabo designed a similar mechanism for a digital currency named Bit Gold in 1998. But, it has never been implemented. However, 10 years later, Bitcoin used those features.

Today, smart contracts are mostly associated with cryptocurrencies. In fact, they cannot exist without the other, and vice versa.

 

Examples of using smart contracts

The blockchain and smart contracts used and accepted widely as revolutionary technology. In fact, it implemented across all levels.

The Depository Trust and Clearing Corporation (DTCC) along with four other large banks such as Bank of America Merill Lynch, J.P.Morgan, Credit Suisse and Citi successfully traded credit swaps on the blockchain developed by Axoni with the favor of using smart contracts. The smart contracts, which are used by them hold the information and data such as individual trade details as well as counterparts risk metrics, which provide the transparency for both regulators and partners.

Smart contracts mostly implemented into the world of banking and finance. However, this technology could  be used by governments globally in order to make the voting system more transparent and accessible. In addition, supply chains can use it to both automate and monitor all the payments and tasks. Other industries such as healthcare, real estate, insurance, taxes, etc. can benefit from too.

 

Disadvantages

Smart contracts consider as extremely young technology. Although, it has many advantages, it can make problems. For example, the codes, which are used to make up the contract need to be perfect and include no bugs. Otherwise, it could turn to a big mistake and give the opportunity to hackers and scammers to steal the funds.

In addition, this new technology comes with many questions. The questions such as how will they be taxed? How will the government decide to regulate those contracts? How would it be if something unexpected happened?

In fact, blockchain makes the contracts perform in any condition. The reason is that they use the term ‘Code is Law’ policy.

Most of those above mentioned problems exist because the technology is pretty young. For sure, it will be developed over the time and will become perfect. Certainly, it will become integral part of our society.

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