What are Smart Contracts?
After the rise of Bitcoin, many new cryptocurrencies were created. The second most popular crypto at the moment — Ethereum (ETH) — was inspired by Bitcoin, but with one main difference: Smart Contracts. ‘Smart Contracts’ are meant to be like normal contracts, except they are online and automated. They are stored on the blockchain which makes it impossible for the contract to be tampered with after it is created. The money involved in the contract can easily be transferred using cryptocurrencies.
An example use of a smart contract goes as follows.
Alice wants to pay Bob to build a new garage. Alice only wants to pay Bob once the work is done to make sure he doesn’t just take her money and leave, but Bob wants to make sure that he actually gets paid once he builds the garage.
Alice creates a smart contract which states that the payment for the construction will only be sent once it is completed. She shares the contract with Bob who accepts the terms.
The money that Alice will use to pay for the construction is automatically set aside from her account to guarantee that once the construction is completed, the payment will be sent. This is the equivalent of holding money in escrow.
When Bob completes the garage, and Alice agrees that she is satisfied with the results, the money is automatically transferred to Bob’s account.
If the construction is not completed, the money is returned to Alice’s account.
If there is a disagreement about whether or not the construction was satisfactory, then the smart contract can either be taken to court or to a third party mediator determined before the contract was signed. In the future, sensors and Artificial Intelligence could be used to automatically resolve smart contract disputes.
The reason why smart contracts are so valuable is because they could potentially replace the third parties needed in contracts today. Since smart contracts are built on the blockchain, transaction fees are either very cheap or nonexistent. Additionally, payments can be completed within an hour by utilizing cryptocurrencies. Instead of having to pay a bank to hold money in escrow and wait for them to pay out the money, smart contracts could be used to make the process cheaper and faster. This could also be applied to online marketplaces like eBay. Instead of having to pay eBay to play the role of the trusted third party to make sure that payments are handled properly, smart contracts could be used instead. Smart contracts can potentially replace middlemen in almost any transaction by making the process faster and cheaper.
Complex smart contracts can also be used to create decentralized applications — dApps. Potential uses for dApps range from online hiring marketplaces without service fees to lending unused computer processing power to people around the world. Another interesting dApp concept is decentralized social media, where users cannot be censored and they don’t have to give their personal information to a large institution.
Check out some other cool applications being built on blockchain here:
Ethereum is not the only crypto that can support smart contracts. Some other well known smart contract platforms include EOS, Cardano, TRON, and NEO.
We will cover the differences between these cryptos in a later article — follow On the Block on Medium, Steemit, Twitter, and Facebook to be notified about future blog posts!
Thanks for Reading :)
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