What is Smart Contract?
By Dr. Smartcontract on ALTCOIN MAGAZINE
“Smart Contract?”
When I first encountered this word I could only roughly understand the concept behind it.
“Right… I understand what contract is but what makes it SMART?”
Well… To understand the concept of smart contract, we need to set up a few background knowledge first.
Let’s go back to the very basic.
What is Blockchain? What is it for?
It is initially devised to grant credibility in transactions made between people.
A simple explanation can be made using an example of a trade receipt and Pooh.
“Winnie-the-Pooh had traded his favorite Honey Jar with Tiger. Let’s say Tiger paid 80 quids in return. They both had a receipt for it. But one day, Tiger needed money urgently so he decided to renumber the amount on the receipt as 120 quids. Tiger claimed Pooh that he needs to receive 40 pounds more. Pooh, of course, argued that he made an agreement on 80 and his receipt says the same. However, Tiger insisted that Pooh is lying. Pooh had no choice but to pay extra 40 quids because he didn’t want to lose the friendship with Tiger.”
That’s the problem when there are only two subjects participating in the trade. One can lie. So, human history made a third-party contractor to prevent such an inconvenient situations. Still, frauds often occur as the third-party guy betrays one by collusion with another.
Now, the concept of Blockchain emerges here. Imagine what if 1,000 people share the receipt? Or, even 10,000 people? Will people be able to lie on their receipt?
The beginning Blockchain aimed to secure a safe and trusted transaction between people by having a number of invigilators.
Then, where does the concept “smart contract” come from?
Again, you need to know a bit more history behind it.
Sorry, this will be short. I hate history, too. Never had attention in the class.
Anyway… Smart Contract is first suggested by the famous Ethereum Platform.
The early blockchain, including Bitcoin, could only deal with transactions. It can only record deposits and withdrawals. Simply, it only tells you where your money goes and comes from. Single function but innovative back then.
Soon, one Russian genius proposed a blockchain-based platform which can convey not only transaction monitoring but also other multiple functions in need.
Ethereum system resembles the relationship between smartphone and application. On the Ethereum “OS”, you can run various applications based on blockchain technology. People call them “DApp”, a decentralized application.
And, it is Smart Contract that enables the development of such decentralized applications.
Smart contract contains commands and conditions which can specify a range of functions. Using Turing complete programming language, smart contract can design almost every command and condition if need. Hence, multiple features can be added to the platform allowing the advent of various blockchain services. Simply, it’s a coding tool to make a network rule.
Let’s be more specific about smart contract itself.
Even it can expand its functions enormously, the very basic form is a trade contract.
Many of you would describe a contract as a document full of complicated words that prove you and your opponent agreed on the given conditions of a trade.
But, this is a very dictionary-like description. Actually, we all make contract everyday. Any sorts of trades can be an example of a contract as long as they have certain elements — i.e. bid, accept, and exchange.
“You bid for what you want. The opponent accepts your bid. Then, an exchange is made.”
This is the basic form of a contract we experience daily.
So, what is smart contract then? What makes it smart?
Technically, smart contract doesn’t require any stamp or paper to make a contract. Based on blockchain technology, it is made fully online and exchanges are carried out automatically as programmed.
Early in this post, I’ve mentioned that the more people share the receipt of trade, the less chance of fraud exists. Blockchain network has multiple participants and any data must go through verification by all. Everyone in the network then becomes your trade’s guarantee.
What if anyone attempts to fake the trade receipt? No worries, dear. Any modification should go through everyone’s verification unless changes cannot be made.
Shared by many and cannot be falsely modified. The right function of blockchain.
The other thing that distinguishes smart contracts from traditional contracts is the absence of a third-party contractor.
Therefore, trades using smart contracts can be free of mediating fees and, moreover, it is free from an error made by contractor as it is automatically done under programmed condition. It’s free and precise.
Remember that smart contract offers high-level programming language. It can describe very specific and complicated orders which can realize broad and gossamer contract. Detailed conditions such as “Send 7 honey jars to Pooh on snowy Saturday” can be made. Further, you can give details to each subject to avoid any probable conflicts. For instance, how many liters per jar, Pooh’s specific address, how many centimeters of snow should be stacked from the ground, and so on. So you can make rules as you wish.
Smart contract is a key element in blockchain. Depending on how you leverage it, you can build a false-proof voting system or an ongoing ecosystem with fair distribution. Plenty of use cases!
That’s it, today!
So far has been a basic explanation of what smart contract is and a bit of background story. I wish you enjoyed it and Dr. Smartcontract is going to be back with another, more helpful post about blockchain and smart contract!
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