What is a Smart Contract?

Patricio Aguirre
3 min readDec 17, 2021

Smart contracts are essentially programs, recorded on a blockchain, that run when certain criteria are satisfied. They are often used to automate the implementation of an agreement so that all participants are instantly confident of the outcome, without the participation of an intermediary or the waste of time.

Smart contracts allow trustworthy transactions and agreements to be carried out between disparate, anonymous individuals without the requirement for a centralized authority, legal system, or external enforcement mechanism.

While blockchain technology has come to be thought of primarily as the foundation for Bitcoin​, it has evolved far beyond underpinning the virtual currency.

Origin

Smart contracts were first proposed in 1994 by Nick Szabo, a computer scientist who invented a virtual currency called “Bit Gold” in 1998. Szabo defined smart contracts as computerized transaction protocols that execute terms of a contract. He wanted to extend the functionality of electronic transaction methods, such as point of sale (POS), to the digital realm.

Many of Szabo’s predictions in the paper came true in ways preceding blockchain technology. For example, derivatives trading is now mostly conducted through computer networks using complex term structures.

How smart contracts work?

Smart contracts operate by executing basic “if/when…then…” statements typed into code on a blockchain. When preset circumstances are met and validated, a network of computers conducts the activities. These activities might include transferring payments to the proper parties, registering a vehicle, providing alerts, or issuing a ticket. When the transaction is completed, the blockchain is updated. This implies that the transaction cannot be modified, and the results are only visible to persons who have been granted permission.

Participants must agree on the “if/when…then…” rules that govern those transactions, investigate any conceivable exceptions, and create a framework for resolving disputes in order to set the terms.

Finally the smart contract can be coded by a developer; however, firms that use blockchain for business are increasingly providing templates, web interfaces, and other online tools to facilitate smart contract construction.

Advantages of Smart contracts

  • Speed, efficiency and accuracy: When a condition is satisfied, the contract is instantly executed. Because smart contracts are digital and automated, there is no paperwork to handle, and no time wasted correcting errors that frequently occur when filling out forms manually.
  • Security: Blockchain transaction records are encrypted, making them extremely difficult to hack. Furthermore, because each record on a distributed ledger is linked to the preceding and subsequent entries, hackers would have to modify the entire chain to change a single record.
  • Trust and transparency: There is no need to question if information has been manipulated for personal gain because there is no third party engaged and encrypted records of transactions are transmitted between participants.
  • Savings: Smart contracts eliminate the need for middlemen to conduct transactions, as well as the time delays and fees that come with them.

Future

For the time being, the most significant hurdle to widespread smart contract use is scalability. Processing data for thousands of internet firms would need a substantial amount of processing power. And capacity and speed are restricted on Ethereum. However, the future of blockchain is only around the corner. Capacity and speed appear to be no longer a problem as initiatives like the Internet of Things (IOTA) and the Internet of Services (IOST) show promising outcomes. This might imply that whole decentralized businesses function on smart contract technology, processing payments, moving assets, and managing day-to-day operations in a safe and distributed manner. Gartner, a research firm, definitely believes so. According to their annual report, smart contracts will be employed in more than 25% of worldwide businesses by 2022. It might be time to start thinking about how smart contracts could help your company.

--

--

Patricio Aguirre

Patricio is a proactive computer engineer - Blockchain Enthusiast & Crypto Learner