What are smart contracts?

Everything you need to know about smart contracts!

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What are smart contracts?

Smart contracts are coded contracts that run on the blockchain without human intervention.

Instead of having someone enforce a contract, a smart contract is a contract made of computer code with a set of agreed-upon conditions that, when met, result in the contract executing automatically. Thus, there is no need to enforce the contract manually.

Smart contracts were first mentioned in the paper Formalizing and Securing Relationships on Public Networks by American computer scientist, cryptographer, and legal scholar Nick Szabo in 1994.

What's an example of a smart contract?

Smart contracts have many potential use cases that are more or less limited by the imagination. Here is one simple example of a smart contract.

Let’s say that Sally has created a digital artwork and lists her artwork for sale.

Instead of relying on a sales agent or third-party site to sell this digital artwork Sally creates a smart contract for the sale. Using a smart contract, she is able to pre-determine the price and conditions for the sale. She can also code her smart contract to receive a royalty for any future sales of the artwork.

The smart contract says that if Bob buys this artwork by sending digital currency to the smart contract address, the ownership of the art is transferred to Bob.

However, if Bob then sells this digital artwork in the future, the smart contract will also take a sum to be paid to Sally as royalties from that sale and any future sales from future owners.

You can see how this automated agreement or smart contract could be more efficient! Sally merely has to set up the smart contract once and never has to worry about ensuring royalties are paid, as these are built into the code.

What are the benefits of smart contracts?

Introducing smart contracts ensures that the conditions of the contract are executed automatically.

This process saves a great deal of time, as once the smart contract has been deployed, it can run autonomously, so there is no need to invest further time in chasing up the conditions of the contract.

There is always transparency with smart contracts - everyone involved is aware of the conditions and the predetermined outcomes, so there is no room for uncertainty regarding the terms.

The removal of human intervention in smart contracts is also more secure, as it eliminates the possible security risk that human involvement may pose. As smart contract transactions occur on the blockchain, they are immutable and cannot be reversed. This also provides another layer of safety to these agreements.

Smart contracts can also automate workflows, leading to an increase in efficiency and productivity - and potentially reduce costs as a result.

What are the limitations of smart contracts?

As with any new technology, there are limitations with smart contracts, too.

While useful, smart contracts are not flexible and cannot adapt to situations like humans can. They can only react to the fulfillment or non-fulfillment of the conditions agreed upon and coded during the initial creation of the contract.

A smart contract does not allow for the possibility of negotiation and cannot react to unforeseen circumstances. If the parties involved in a smart contract fail to think of and code certain possible outcomes into the smart contract, the smart contract cannot decide in those cases, and the lack of human intervention becomes an issue rather than a benefit.

The security of a smart contract can also differ depending on the security protocols that have been programmed into its execution.

In short, a smart contract is only as good as its code.

What's the future of smart contracts?

Since 2014, when Ethereum co-founder Vitalik Buterin proposed creating smart contracts with blockchain technology in the Ethereum whitepaper, smart contracts have gone from an idea to a reality that continues to grow.

Today, the Ethereum blockchain and other similar blockchain platforms support smart contracts in various ways and continue to push the boundaries of what these smart contracts can do.

However, the technology is still new, and businesses, governments, and individuals are all exploring different ways to use it.

One of the more popular uses for smart contracts is issuing digital tokens like ERC20 tokens. In the future, smart contracts could potentially even be used to help improve transportation, supply chain logistics, cloud computing, freelancing platforms, investing, governance, and much more.

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