Traditional contracts lack the ability to enforce their terms by themselves. Therefore intermediaries like governments are required to supervise the fulfillment of these terms and ensure that all included parties complete their part of the contract.
So what happens if one of the parties violates the contract’s terms? To address the breach, the parties would need to rely on an intermediary, which can be slow and expensive.
Due to the recent developments in blockchain technology, however, we no longer need to depend on a third party to oversee the fulfillment of a contract’s terms. Instead, we can use smart contracts, which will immediately enforce the agreed-upon terms as needed.
In 1994, cryptographer Nick Szabo designed a protocol that can be used to both define the terms of a transaction and enforce them. As opposed to conventional contracts, which depend on middlemen like lawyers to enforce transactions, smart contracts can enforce them automatically.
Next up, we will explore what smart contracts are, as well as how smart contracts work.
What Are Smart Contracts?
A smart contract is a core component of blockchain systems like the Ethereum blockchain. We can define them as computer programs that are used and hosted on a blockchain network.
Every smart contract holds a set of instructions that define the conditions that result in predefined outcomes once they are met. Smart contracts enable multiple participants to reach their shared objective in a precise, quick, and secure way using decentralized blockchain systems instead of centralized computers.
Crypto smart contracts provide a distinct infrastructure for automation because they aren’t managed by a central authority and aren’t vulnerable to a single point of failure. Furthermore, smart contracts minimize risks, increase transparency, and reduce costs.
How Do Smart Contracts Work?
We learned what smart contracts are. Now let’s see how they work.
Smart contracts use if-then logic to perform actions. Once the necessary contract specifications are met, the contract is executed.
The simples smart contract example is a vending machine. As soon as you provide the requested amount of money and select a beverage, the machine serves that beverage. The terms of the contract are clear, and the fulfillment of the transaction occurs on its own.
Every smart contract is usually dedicated to a particular action, but we can also combine multiple smart contracts to achieve more complex goals. With this ability, decentralized apps (dApps) were made possible, and thus, the usability of smart contracts was extended significantly.
While there’s a great variety of dApps available today, we would point out decentralized exchanges which allow different parties to exchange their crypto assets using smart contracts.
Additional smart contract example uses:
- Financial services
- Digital Identity
- Supply chain management
- Asset ownership
- Retail
There’s no lack of smart contract programming languages either, such as Solidity which is used on the Ethereum network. Blockchain developers can use these languages to create smart contracts and host them on the blockchain network.
