Hey, today I want to talk to you about something called “smart contracts.”
So, what are smart contracts?
A smart contract is a computer program that helps make sure that promises are kept between both parties. Smart contracts are often used with digital money, like cryptocurrencies, and they make sure that payments are made on time and that important agreements are followed.
For example:
- Transferring money to another crypto wallet
- Trading a stablecoin like USDC for Bitcoin on a Defi exchange like Uniswap
Smart contracts are different from regular contracts because they use computer code instead of just words to make sure that things are done the way they’re supposed to be.
They’re basically computer programs or transaction protocols that are designed to automatically execute, control, or document events and actions based on the terms of an agreement.
For example, swapping 100 Tether for 0.00083 ETH.
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The Main Idea
The purpose of smart contracts is to reduce the need for trusted intermediaries, arbitration costs, and fraud, as well as to minimize accidental or malicious exceptions.
The smart contracts created by Ethereum are widely seen as a key building block for decentralized finance (DeFi) and non-fungible tokens (NFTs).
How do smart contracts work?
Well, since the launch of the Ethereum blockchain in 2015, the term “smart contract” has often been used to refer to general purpose computation on a blockchain or distributed ledger.
The US National Institute of Standards and Technology (NIST) defines a smart contract as “a collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network.” In this interpretation, which is used by organizations like the Ethereum Foundation and IBM, a smart contract isn’t necessarily related to the classical concept of a contract, but can be any type of computer program.
Smart contracts can also be thought of as secured stored procedures, since their execution and codified effects (like the transfer of value between parties) are strictly enforced and can’t be manipulated.
Once a transaction with specific contract details is stored on a blockchain or distributed ledger, it can’t be changed. That’s because the actual execution of contracts is controlled and audited by the platform, not by arbitrary server-side programs connecting to the platform.
Use Cases
- Cryptocurrency transactions: Smart contracts can be used to facilitate the exchange of cryptocurrencies between parties. For example, a smart contract could automatically release payment to a seller once certain conditions (such as the delivery of goods) have been met.
- Supply chain management: Smart contracts can be used to automate and streamline the process of managing a supply chain. For example, a smart contract could automatically trigger the release of payment to a supplier once a delivery has been received and verified.
- Real estate transactions: Smart contracts can be used to automate the process of buying and selling real estate. For example, a smart contract could be used to automatically transfer ownership of a property once the buyer has made the final payment and all conditions of the sale have been met.
- Insurance claims: Smart contracts can be used to automate the process of processing and paying insurance claims. For example, a smart contract could be used to automatically release payment to an insured individual once their claim has been verified and approved.
- Voting systems: Smart contracts can be used to facilitate secure and transparent voting systems. For example, a smart contract could be used to ensure that votes are accurately counted and that the results cannot be tampered with.
FAQ
Q1: What is a smart contract?
Answer: A smart contract is a computer program or transaction protocol that is designed to automatically execute, control, or document events and actions according to the terms of an agreement.
Q2: How do smart contracts work?
Answer: Smart contracts are executed and enforced using blockchain or distributed ledger technology. Once a transaction with specific contract details is stored on the blockchain or ledger, it cannot be changed. The actual execution of the contract is controlled and audited by the platform, rather than by arbitrary server-side programs.
Q3: What are the benefits of using smart contracts?
Answer: Smart contracts can reduce the need for trusted intermediaries, arbitration costs, and fraud, as well as minimize accidental or malicious exceptions. They can also increase efficiency and speed up the process of completing agreements and transactions.
Q4: Are smart contracts legally binding?
Answer: It depends on the jurisdiction and the specific terms of the contract. In some cases, smart contracts may not be legally enforceable. However, smart legal contracts, which are traditional agreements written in natural language and machine-readable code, are intended to be both executable by a machine and legally enforceable.
Q5: What are some common applications for smart contracts?
Answer: Smart contracts are commonly used in cryptocurrency transactions and can play a role in decentralized finance (DeFi) and non-fungible token (NFT) applications. They may also be used for other purposes, such as supply chain management, real estate transactions, and more.
