What are Smart Contracts?
In previous lessons, we identified that one of the cornerstones of Ethereum are smart contracts. Smart contracts are utilized in a range of functions, ranging from the creation of tokens to fueling the growing decentralized finance industry. With all of the excitement centered around smart contracts, we will provide more depth into the seemingly endless possibilities.
What Are Smart Contracts?
Smart contracts are self-executing contracts written in lines of code, which contain all the terms and conditions agreed upon by all the parties involved. It involves a set of conditions or rules (agreed by each party). On meeting these conditions, the code (contract) self-executes and produces the set output.
Smart contracts are more like conventional contracts but better. Operating on blockchain networks, Smart Contracts enjoy all the benefits of blockchain technology. This includes top-notch security from encryption and decentralization, transparency, and immutability.
How Do Smart Contracts Work?
Let’s use an example for this explanation.
We have Mike who wants to buy a house from Jane. Jane wants 300 Ether for her house. Mike sends the 300 Ether to an escrow account. Once Jane receives the funds, she relinquishes ownership of her house to Mike. Only when Mike makes the full payment does he get ownership of the house.
The smart contract ensures all terms and conditions of the agreement are met before the contract’s execution. Mike does not get ownership of the house if he sends anything less than 300 Ether. If Jane fails to relinquish ownership of her house, the money is sent back to Mike.
Benefits of Smart Contracts
Some of the benefits that come with smart contracts include:
Smart contracts are self-executing contracts. This means they don’t need any third-party intervention to work. They verify and execute contracts. This eliminates the possibility of a third party manipulating the agreement.
Operating on the blockchain network ensures smart contracts are secure from attacks and manipulation. Encryption makes it hard for hackers to decipher information in the contracts. Decentralization makes it even harder for unauthorized persons to access the contracts.
With smart contracts come the benefits of blockchain technology. This includes immutability and transparency. Transparency enables parties to an agreement to see how transactions took place. Immutability assures them there can never be an alteration to the agreement without them knowing.
Conventional contracts tend to be expensive to execute due to the many parties involved in the process. Smart contracts eliminate the need for unnecessary intermediaries. Without intermediaries, service charges get greatly reduced, saving you cash.
Smart Contract Platforms
Ethereum is a blockchain-based platform that allows the sending and receiving of cryptocurrencies. It can record transactions and allows developers to utilize the security and scalability of its blockchain technology.
Stellar is another platform known for smart contracts. It was founded in 2014. Stellar aims to make sending money internationally faster, easier, cheaper, and more secure.
Founded in 2014, Neo is the first digital coin in China. It is an open-source platform for smart contracts. It is known as the Chinese Ethereum because it borrows heavily from Vitalik Buterin’s Ethereum.
Smart Contract Use Cases
Smart contracts make it easy and cheaper for people to buy or rent houses. As smart contracts enable direct transactions between parties, they eliminate the middle man charges. And, with transparency in play, thanks to blockchain, parties can see the whole transaction process.
2. Supply chain:
Smart contracts make it easy for people to trace the source of their products. You can easily tell how long your product stayed in transit, where it stopped, why it stopped, and how long it there. All this information helps to know the state and quality of your product.
Smart contracts can help eliminate rigging in elections and corruption in governments. The contracts’ security and transparency eliminate the possibilities of tampering and manipulation of election and other government processes.
Smart contracts are one of the greatest inventions to come out of the crypto space. They continue to empower developers to push the limits of how blockchain technology can be utilized to disrupt all facets daily life. From providing greater consumer privacy protection to the explosive growth of DeFi, smart contracts have become the heartbeat of the fast-evolving Ethereum ecosystem.