By Michael Scott
Overview of Smart Contracts
Smart contracts are digital contracts stored on a blockchain. They automatically execute after specific conditions are met.
In Web3, they act like pollen, meaning they are everywhere, whether noticeable or not. They are critical to the new internet’s operation and growth.
Every time a user makes a peer-to-peer trade on a crypto exchange, a smart contract eases the transaction without intermediaries. Further, when a person buys a piece of art on a nonfungible token (NFT) marketplace such as OpenSea, a smart contract confirms the transaction and transfers ownership.
Any time a person participates in a DeFi protocol to borrow or lend, a smart contract automatically enforces the loan terms.
How Do Smart Contracts Function?
They operate on simple ‘if/when…then…’ statements. In case a particular condition is met, the contract executes the agreed-upon action.
One can consider a vending machine. A coin is inserted (condition met), and the machine releases a snack (action implemented).
Smart contracts work the same but in the digital sphere. For instance, when a person sends a specific crypto amount to a smart contract, a digital asset is automatically sent to their account.
Blockchains have a critical role as a decentralized ledger that records all transactions safely and transparently. A smart contract is stored on the blockchain following its creation.
After conditions are met, the blockchain confirms and records the transaction, ensuring transparency and tamper-resistance. Hence, every person involved can trust that the contract will execute precisely as programmed, without requiring a centralized authority or intermediary.
History of Smart Contracts Explained
The smart contracts concept has an interesting history dating back numerous decades and has changed considerably.
- Nick Szabo’s concept: In 1994, the computer expert and legal scholar unveiled the smart contract idea. He foresaw the utilization of software to enforce contractual agreements automatically, eradicating intermediaries.
His concept was revolutionary, suggesting that digital code could manage and implement contract terms.
- Bitcoin’s emergence: Bitcoin’s introduction in 2008 by Satoshi Nakamoto, an anonymous group or individual, laid the foundation for blockchain technology. The underlying blockchain illustrated how a decentralized and tamper-prof ledger could back digital transactions, setting the stage for more improved apps such as smart contracts.
- Ethereum’s proposal: In 2013, Vitalik Buterin proposed Ethereum. He envisioned developing a decentralized platform where developers could develop and execute intricate applications.
- Ethereum’s unveiling: Ether, Ethereum’s cryptocurrency, was officially launched in 2015. It marked a significant milestone and opened up possibilities for different sectors.
- ICO (ICO) boom: The 2017 boom illustrated smart contracts’ potential. Startups utilized Ethereum’s platform to create and sell tokens.
- DeFi and NFTs: From 2020 onwards, smart contracts have been at the core of the DeFi movement and NFTs’ rise
Smart Contracts Application Explained
First, decentralized finance (DeFi) is one of the most significant applications of smart contracts. DeFi apps utilize smart contracts to create financial instruments such as lending, borrowing, and trading without conventional banks.
Smart contracts enhance supply chain efficacy and transparency by monitoring goods from production to delivery, ensuring correct and real-time data.
In healthcare, smart contracts can streamline processes, ensuring the accessibility of sensitive data to authorized persons. Insurance firms utilize them to automate claims processing and reduce costs and time.
In gaming, smart contracts can manage in-game assets and ensure fair play, enabling true ownership of digital assets.
What Are the Benefits of Smart Contracts?
Examples of benefits include:
- Speed and efficacy
- Trust and transparency
- Accuracy
- Security
- Cost reduction
What Are Smart Contracts Challenges and Limitations?
Examples include:
- Need for precise coding
- Immutability
- Security gaps
- Dependence on programmer expertise
End Thoughts
With technological advancements, more sophisticated and user-friendly tools for generating and managing smart contracts will emerge. Improved security interventions and coding standards might emerge, minimizing susceptibilities and improving smart contracts’ reliability.
As smart contracts’ benefits continue becoming more recognized, adoption is anticipated to spread to more industries. For instance, governments might utilize them for transparent voting systems, while businesses might utilize them to automate intricate compliance processes.