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What are Smart Contracts?

Smart contracts (sometimes called “distributed apps”) are quite popular nowadays. But what are they, and how do they address problems?

Nick Szabo coined the term “smart contract” in 1997, long before Bitcoin. I’ll spare you his precise words because he’s a computer scientist, a legal scholar, and a cryptographer.

But in simple terms: he intended to use a distributed ledger to store contracts. Now, smart contracts are just like contracts in the real world. The only difference is that they are fully digital.

In truth, a smart contract is basically a little computer program that is stored inside a blockchain.

Smart contracts are more than just digitally signed contracts. They are computer programs that use blockchain technology. The agreement’s terms are managed via code, enabling fully automated execution.

Each smart contract is built up of code that specifies specified criteria that, when fulfilled, cause events to occur.

Smart contracts allow several parties to achieve a shared result in an accurate, timely, and tamper-proof manner by running on a decentralised blockchain rather than a centralized server.

The fact that the contract’s many conditions can also be written as rules are what makes this smart contract so valuable. Some of the rules are good, such as when a milestone is met and approved by the customer, while others are negative, such as when a supplier delivers a product or service that falls short of the client’s expectations.

Smart contracts are a revolutionary method to manage complicated agreements, and their automated nature may even impact the development of future contracts.

The History of Smart Contracts

As stated before, an American computer scientist Nick Szabo first coined the term “smart contracts in 1994. Smart contracts were first used in vending machines (for example, a precise code leads to an expected snack). However, smart contracts gained traction after the release of Ethereum, which employs the Solidity programming language to design the contracts. The first protocol smart contract was enabled by the Bitcoin blockchain, which was introduced in 2009 and specified a set of rules that had to be followed in order to move Bitcoins among network users. The user must sign the transaction with the correct private key that matches their public address (similar to a password tied to a specific account) and have sufficient funds to cover the transaction.

A multi-signature transaction, which needs a defined number of users (public keys) to sign a transaction with their private keys before it is considered legitimate, was introduced in 2012. It improved the security of user funds by removing single points of failure, such as a lost or stolen private key.

With the publication of Vitalik Buterin’s Ethereum whitepaper in 2013, blockchains made their next big breakthrough in smart contracts. The Ethereum smart contract blockchain featured a “world computer” that could operate many independent smart contracts at the same time, rather than acting as a single smart contract application or offering a few limited opcodes.

How Smart Contracts Work

Smart contracts are tamper-proof programs statements that are written into code on a blockchain. Their logic: “if/when x event happens, then execute y action.”

When preset conditions are satisfied and validated, the process is carried out by a network of computers. The smart contract specifies how users can engage with it, including who can interact with it, when they can interact with it, and which inputs result in which outputs. That means the transaction can’t be modified, and the results are only visible to those who have been granted access.

There are multiple smart contract languages for programming, with Solidity being the most popular. Smart contracts can be built by a developer, but firms that employ blockchain technology are increasingly providing online tools to make them easier to structure.

There can be as many specifications as needed in a smart contract to convince the participants that the task will be executed correctly. The transaction can’t be modified, and the results are only visible to those who have been granted access.

Smart Contract Limitations

One of the smart contracts’ fundamental drawbacks is that the blockchains on which they run are isolated networks, meaning they have no built-in link to the outside world. Smart contracts cannot interface with external systems to confirm the existence of real-world events or utilise cost-effective computational resources without external connectivity. Like computers without Internet access, smart contracts are severely limited without real-world connectivity.

The other pushback to smart contracts is that, rather than being able to read a contract written in simple English; the user has to study the code and know the programming language. Few users are aware of how to do so, and even fewer make the effort to do so. Those who oppose smart contracts say that the system isn’t entirely “trustless”.

Conclusion

Smart contracts are one of the future technologies to keep an eye on. While maturing at their own pace, they have proved to be a very efficient technology and have boosted the utility of blockchains by resulting in superior digital agreements across a broader range of industries and use cases.

We hope that this post was informative and that you now have a better understanding of smart contracts and what they are.

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