What is Smart Contract?
A smart contract can be described as a computer-encoded agreement between two or more parties that automatically puts its provisions into effect upon the occurrence of certain conditions. In other words, a smart contract is a piece of code with embedded agreements that lives on the distributed ledger blockchain and is set to run automatically once certain criteria are satisfied
In this post, we'll learn what smart contracts are, where they came from, how they function, some common applications, some potential pitfalls, and some real-world issues they address.
But lets start with short story by ChatGPT that illustrate how smart contracts works in crypto.
Once upon a time there was a farmer who wanted to buy a new tractor. He had saved up enough money to buy one, but he was wary of being scammed. He had heard about smart contracts and decided to use one to secure the purchase.
He found a trustworthy seller and wrote a smart contract that stated the terms of the purchase. The contract stipulated that the seller would receive payment in cryptocurrency only after the tractor was delivered and the farmer was satisfied with it.
The farmer sent the payment in cryptocurrency to an escrow account that was managed by the smart contract. Once the tractor arrived and the farmer was satisfied with it, the smart contract released the payment to the seller.
The farmer was pleased with the results of the transaction. He now had a new tractor, and the seller had been paid in full. The smart contract had ensured that both parties fulfilled their obligations and that the transaction was secure and verifiable.
Who is behind this technology?
Nick Szabo, a computer scientist, and cryptographer who is credited as being the first person to suggest the idea of smart contracts in the 1990s. Unfortunately, the implementation of smart contracts did not become a practical reality until 2008, when the technology known as blockchain was first introduced. Ethereum, the first platform for blockchain-based smart contracts, was released to the public in 2015. At that time, smart contracts have found utility in a wide range of contexts, such as the management of supply chains, real estate transactions, insurance policies, and many more.
The operation of smart contracts
Smart contracts are programs that operate on a decentralized blockchain network. They are composed of coded terms and conditions, which are permanently stored on the blockchain, making them resistant to interference. When predetermined conditions are met, smart contracts execute automatically, and their execution and results are visible to all involved parties.
When the conditions that have been established are satisfied, smart contracts are automatically carried out, and once they have been deployed, they cannot be modified in any way. The execution of the smart contract conditions is transparent, and all parties participating in the contract have the ability to independently verify the results.
Smart contracts are constructed using blockchain technology, which serves as the underlying technology. The blockchain is a distributed and decentralized ledger that records transactions in a way that is both safe and open to public scrutiny.
Ethereum is presently the most commonly used platform for smart contracts, but other blockchain networks like Algorand, EOS, Neo, Tezos, Tron, and others can also support them. Smart contracts are publicly visible, allowing anyone to examine their code and logic. Smart contracts are coded using various programming languages, and their code is stored on the blockchain for all network nodes to review. All nodes on the network store a copy of all smart contracts, their current state, and transaction data. The code of a smart contract is executed by all network nodes to reach a consensus on the result and value flow when funds are sent to it. Usually, smart contracts cannot be modified once deployed, ensuring that they cannot be censored or shut down.
Smart contracts pros
Increased productivity: Because smart contracts work without the involvement of a third party, the time and money normally spent on traditional contract execution are significantly reduced.
Safety: Since smart contracts are saved on the blockchain, they cannot be altered in any way and are immune to tampering. This protects both the security of the contract as well as its integrity.
Openness: As smart contracts are open and accessible to all parties involved, the results of the contract may be independently verified. Because of this, there is no longer a requirement for trust between the parties.
Smart contracts cons
Smart contracts are complicated computer programs, their development and deployment call for highly specialized knowledge. Because of this, their widespread adoption may be difficult to achieve.
The legal status of smart contracts is currently unknown in many different jurisdictions, which creates a legal ambiguity. In the area of smart contracts, there is a pressing need for the development of legal frameworks that would provide clarity and predictability.
Smart contracts are programmed to execute automatically after the preset criteria have been met. This limits the amount of flexibility that can be built into the contract. Due to the lack of flexibility they possess, their application may be restricted in some circumstances when adaptability is essential.
Final thoughts
In conclusion, smart contracts are an exciting piece of technology that possesses the potential to revolutionize a wide range of business sectors. They are safe, open, and impossible to alter, doing away with the requirement for middlemen while simultaneously increasing operational efficacy. However, the development and deployment of smart contracts need specific skills, and their legal standing is still unknown in many jurisdictions. This is due to the fact that smart contracts are based on blockchain technology. It is anticipated that when these difficulties are resolved, smart contracts will be implemented more broadly, which will result in increased levels of productivity, transparency, and security across a variety of industries.
