Tales of Cryptocurrencies(2) — What is a Smart Contract?

Today, we will learn about “smart contracts,” a new form of smart technology that surfaced along with blockchain technology.

The concept of smart contracts was first introduced in 1994 by cryptographer and programmer Nick Szabo. Traditional contracts, signed face-to-face, are inefficient in the sense that each step of the way, from making amends to fulfilling the terms, must be carried out by human beings. To simplify the process, Nick Szabo introduced the concept of digital contracts, whose terms are automatically completed once the conditions are met.

However, the problem with digital contracting was that it lacked the presence of a mediator who could guarantee the integrity of the contract. Also, forging or manipulating the document could be done with relative ease. As a consequence, digital contracting remained just a theory.

As time passed, the world witnessed the advent of bitcoin and blockchain. These new technologies, which work on a structure in which numerous participants share the same encrypted information (see Tales of Cryptocurrencies(1) — Byzantine Generals Problem), paved the way for a new environment in which smart contracts are finally feasible.

Bitcoin Script was the first smart contract made, based on the first ever made cryptocurrency, Bitcoin. Its contents stipulate the following: “As long as the balance and the signature of a transaction can be verified, the transaction is deemed legitimate.”

However, Bitcoin had its inherent limits in that does not account for anything but transaction history and balance information. To surmount these limitations, in 2013, Vilalik Buterin created Ethereum, which could be applied not only to currency exchange but also all transactions that occur in daily life. From then on, smart contracting became a reality, and such new applications of the blockchain database were thereby known as blockchain 2.0.

Smart contracts can be applied to numerous fields, the most standout example being the ethereum-based ICO. Let me provide an example using FirmaChain’s ICO.

Contract terms: FirmaChain will provide 20,000 FCT to the buyer in return for 1 ETH.

FirmaChain converts the above-mentioned contract terms into computer language terms and provides the buyers with an Ethereum wallet address. Here, the Ethereum wallet address also functions as the address for the contract.

Buyers can deposit Ethereum and receive FCT via this contract address. Because we use open source coding, anyone can verify the contents of the contract.

I hope this write-up on smart contracting was an interesting read. I will be back with more exciting content.

Thank you!

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