What are smart contracts? — Beginners guide
Blockchain has started a huge revolution in lots of aspects in our lives, it has the potential of disrupting so sectors such as financial services, healthcare, logistics, social networks, online gaming and much more. The first and biggest change blockchain brings is the way we think, use and interact with money. This started with Bitcoin, which brought a decentralized global system of transacting value. After Bitcoin, the most prominent cryptocurrency is Ethereum, which brought us the first implementation of smart contracts.
The term “Smart Contract” was first defined in 1996 by Nick Szabo. It was originally described as: “A computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract”. Today’s smart contract is slightly different from this definition, it can be thought of as independent, autonomous, computer code that runs on a decentralized network and is able to receive, transfer and store money. Let’s look at this new definition piece by piece.
- Independent — This means it doesn’t have an owner and no one can control or modify it.
- Autonomous — This means it works solely according to its code and maintains its own balance (represented as Ether).
- Computer code — This one is pretty straightforward yet very important to remember. Since it is a computer code it cannot make mistakes (the only one who could make a mistake is the developer wrote it). Also, because it is computer code, the results for each interaction/execution are completely predictable. It cannot run away with your money or be biased like humans.
- Runs on a Decentralized Network — Decentralization is the most important security measure that keeps smart contracts as powerful as described. In a centralized network, anyone who controls the running environment of the code can control or manipulate the code workflow itself.
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Decentralization means the code doesn’t run on a single computer, instead, it runs on an open network of computers where anyone can run and validate the code. In this case, Ethereum is the running environment, but it can be generally any blockchain that allows running smart contracts on it. It is worth mentioning that the main difference between Bitcoin and Ethereum is that Bitcoin allows a limited set of commands (Turing incomplete) while Ethereum allows programming with a fully functioning programming language (Turing complete). In short, the decentralized running environment is important to make smart contract immune to manipulations by some owner of the system and allows it to be “unstoppable” and more resistant to attacks.
The ability to Receive, Transfer and Store Money — As part of its functionality, smart contracts should be able to enforce their terms on their users. Enforcement of smart contracts is done financially by the contract itself and therefore should be maintainable from code. In contrast to regular fiat money, cryptocurrencies exist completely in code and therefore can be programmable. Using cryptocurrencies (like Ether in this case), smart contracts are able to manage their own accounts and handle complex financial transactions which eliminate the need to go through a middleman and allows full enforcement of the terms.
In conclusion, smart contracts are the new way for people to create and manage any financial (or indirectly financial) system, without going through middlemen which gives birth to cheap, trustless, automated and unstoppable applications or services.
In the next article, we will explore what Dapps are (Decentralized Apps) and how they use the power of smart contracts as the infrastructure of a new web and economy.
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This guest article was written by Ben Kaufman, founder of BitCampus.io
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