In 1994, there were no digital platforms like the ones we know today, which is why Nick Szabo’s concept of smart contracts did not receive the attention it deserved until almost 20 years later. Let’s go into detail and examine what smart contracts are and how they came to be: A smart contract or crypto contract is a computer programme that directly controls the transfer of digital currencies or assets between contracting parties and precisely defined conditions.
It is stored on a blockchain and automates and facilitates an agreement’s negotiation or performance. Smart contracts can replace and supplement legal contracts by recording all the details in computer language as instructions. Therefore, all participants have immediate certainty about the outcome without the need to involve a mediator or lose extra time. They often act as trustees and ensure that all funds and property rights are transferred into the system and that the participants receive the money simultaneously. A smart contract can work alone or be reinforced with various other smart contracts.
How does a smart contract work?
The contract is written as code and published into the blockchain. The involved people are anonymous, but the contract is visible to all involved parties. An event like an expiration date or strike price needs to be set, and the contract executes itself to the coded conditions. The blockchain is for understanding the market’s current activity while maintaining individuals’ privacy. In addition, it offers security for the whole process. The first step is to write instructions as an “if…then…” -function into the blockchain’s code.
A network takes care of these actions. After closing the transaction, the blockchain gets updated, and the results are fixed.
Advantages of Smart Contracts:
- People don’t waste time because of automatization and the digital.
- Everything is trustful and transparent. Everything is encoded, and no third party is needed.
- Thanks to blockchain, Smart Contracts are very secure. Every record is connected to the previous and following ones on a distributed ledger. Therefore, it would be hard for hackers to alter the entire chain and change something.
- The absence of intermediaries reduces the costs as there are no fees to pay.
- You can offer great deals, promotions and benefits to the parties in the contract to encourage future engagement and business.
How to use Smart Contracts?
They can be used in traditional financial departments besides the blockchain network. This works the following way: The contract parties can use an external source to update the blockchain’s essential information and fulfil the conditions. Smart Contracts can also help to transform traditional transactions because they ensure the involved parties will stick to the agreement.
Examples of Smart Contract cases:
- The Smart contract works within the framework of blockchain. It uses all the advantages of decentralized systems. One outstanding development of blockchain is play-to-earn games. They became more popular, and users have the opportunity to generate additional income. Having a secure and reliable system is vital to keep track of all financial transactions. Smart Contracts ensure that players receive their NFT assets and that they will not disappear if the developer’s support for the game stops, for example.
- Technology has improved the legal industry. Smart contracts are being used as legally binding contracts because of their transaction speeds and low costs. For example, California allows marriage licenses to be issued via blockchain technology.
- A lot of Defi applications are using Smart Contracts. With them, it is possible to operate fully permissionless long-term and scalable manner. Many use cases, such as stablecoin, margin trading, derivatives and general lending, were simplified.
Technology has nearly no limits. That is why it is hard to define the potential for the application of smart contracts. But for sure, Smart Contracts are improving how individuals exchange information, access financial services, and interact with each other.
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