Smart Contracts: Everything You Need To Know
To completely understand Ethereum, you need to understand what a smart contract is. Ethereum isn’t just a cryptocurrency, it’s also a platform to make other blockchain operations.
The Ethereum platform has a coin called Ether, which is generally used to pay for transaction charges in the network. Ether is also used to run contracts and smart applications on the Ethereum blockchain.
Following the growing popularity of Ethereum, you might be wondering “what is a smart contract?”
Let’s answer this question for you.
What Is A Smart Contract?
A smart contract is a simple computer code that runs on the blockchain and is stored in a public database that cannot be changed. Transactions in a smart contract are processed by the blockchain and can be transferred automatically without an intermediary or a third party. Though transactions only occur when the agreement’s terms are met, there are no third parties or trust issues.
History of Smart Contract
In 1994, when cryptocurrency didn’t yet exist, Nick Szabo (a cryptographer) came up with the idea of registering contracts in computer code. This contract would start automatically when certain conditions were met. This idea would remove the need for trusted third-party companies (like banks), meaning you no longer need a trusted third party when you make a transaction. Instead, contracts or deals would be self-executed on a trusted network that’s wholly controlled by computers. Szabo worked on this idea for many years and wrote a book called “Smart Contracts Basic Blogs for Free Digital Markets.” Back then, in 1994, blockchain technology did not exist.
In 2009, Bitcoin introduced the first use of blockchain technology. In 2015, Ethereum finally introduced the first smart contract.
How Does A Smart Contract Work?
Smart contracts are automatically implemented once the terms of the agreement are met. So, a third party such as a bank, a broker, or an authority is not required.
For instance, let’s imagine Joseph wants to buy Matt’s house. Then an agreement is formed in the Ethereum blockchain through a smart contract. In simpler terms, the deal will appear like this “when Joseph pays Matt 300 Ether, Joseph will gain possession of the house.”
Once this smart contract agreement is proven, it can’t be altered, which means Joseph doesn’t need to worry about paying Matt 300 Ether for the house. Without using a smart contract in the above scenario, Matt and Joseph would have to pay some charges to third-party companies such as the bank, a counsel, and a broker.
But with smart contracts, they do not have to pay lawyers to draft an agreement. This is precisely one of the few instances of how a smart contract can be applied.
The Benefit Of Smart Contracts
Security. Smart contracts run on a blockchain, which is almost impossible to hack. Transactions are encrypted, and records are connected and distributed on a ledger.
Transparency. Smart contracts don’t require a third party. All transaction records are shown on the ledger and shared with each participant on the network.
Speed and accuracy. A smart contract is automated, so when its conditions are met, the contract is implemented immediately. There is no error since paperwork processes are not needed to start the contract.
Application of Smart Contracts
The potential for smart contracts is unlimited. They can be used in various fields such as supply chain, health care, voting system, and financial services such as collaborative financing agreements (ICOs), insurance among others
Supply chain
Smart contracts can be applied to solve the problems of the traditional supply chains by cutting the process passed through by the paper system.
A smart contract will remove the possible risk of fraud by delivering safe and accessible digital versions of forms to all parties involved and can be used to automate payment and tasks.
Health Care
Health records and patient history can be encoded and stored on the blockchain with a private key, and accessed by specific individuals for a detailed medical survey and personal data protection.
Government Voting System
Smart contracts can improve the traditional voting system, which is easy to manipulate. Voting with smart contracts will be transparent, ledger protected, and almost impossible to decode.
Smart contracts could also check the inefficiency of the traditional voting system, which could increase the number of voters.
Financial Services
Smart contracts enhance financial services in several ways. In the case of a financial agreement, raising funds for the new projects has been made possible through ICO.
Disadvantages of Smart Contacts
Possible Loopholes
Using smart contracts makes it difficult to guarantee that the agreements were met based on what was agreed upon.
Difficult to modify
An error in a smart contract is challenging to correct and may be costly and time-consuming.
How Are Smart Contracts Created?
Smart contracts can be built on several blockchain platforms, including Ethereum and NEO. Since Ethereum is the most popular option for inventors, you can create smart contracts on the Ethereum blockchain. Smart contracts are developed using Ethereum’s original coding language, called Solidity.
If you don’t have an ETH coin and want to purchase it, you can use Binance — one of the popular cryptocurrency exchanges.
Smart contracts are gradually replacing intermediaries and show great potential for the future of operations and transactions. The best thing about not having intermediaries is that it allows us to save a lot of money. Not only that, there also won’t be any trust issues.
But there is also an apparent disadvantage: a lack of intermediaries will cause people to lose their jobs since the current intermediaries are humans. Why would you hire someone to do a job that could be done for free through a smart contract?
Of course, no one knows what the future holds. All we can do is guess and forecast, but we must be prepared for all possible results.
