Smart contract are among the basic foundational elements for Ethereum apps. They are computer-generated programs stored on the blockchain, which allows us to transform conventional contracts to digital counterparts. Smart contracts are extremely logic based, following an if this then this structure. This means that they operate exactly according to the program and cannot be modified.
Nick Szabo coined the term “smart contract”. In 1994 Szabo composed an intro to smart contracts and later in the year 1996 an examination of what smart contracts could be able to do..
Nick Szabo envisioned a digital market based on these automated and cryptographically secure methods. A space where business and transaction processes can be carried out without a trace with no intermediaries. Smart contracts built on Ethereum implement this idea into action.
Which are the definitions of contracts?
You’re likely to be considering: “I’m not a lawyer! Why would I care about contracts?”. Most people think that contracts are a source of lengthy terms and condition contracts or tedious legal agreements.
Contracts are simply agreements. In other words, any kind of agreement could be contained into the terms of the contract. Contracts written in pen and paper can be used for various things, but they’re not free of flaws.
Contracts and trust
One of the most difficult issues when it comes to a traditional contract is the requirement for trustworthy people to be able to keep the outcomes of the contract.
Here’s an example:
Alice Bob and Bob are participating in the race of their lives on bicycles. Let’s suppose that Alice places a bet with Bob $10 that she’ll take the victory. Bob believes he will win and is willing to bet. At the end of the day, Alice wins the race over Bob with the obvious winner. However, Bob isn’t willing to pay for the wager, saying Alice has cheating.
This example shows the flaws in any agreement that is not smart. Even if the terms of the agreement are met (i.e. you’re the winner of the race) however, you still need to be able to trust another person to honor the contract (i.e. payment to the person who placed the bet).
Smart contracts digitalize agreements by transforming the contract’s terms to computer-generated code which is executed when the contract’s conditions are fulfilled.
A digital vending machine
An easy metaphor for a smart contract could be vending machines that functions in a similar way to a smart-contract – specific inputs ensure that certain outputs are guaranteed.
- You choose the product you want to purchase.
- The machine will return the money needed to purchase the item
- The correct amount is entered.
- The vending machine checks to ensure that you’ve entered the exact amount
- The vending machine distributes the desired product
The machine will provide the item you’ve selected when all the requirements have been satisfied. If you do not select the right product or deposit enough cash, the machine will not be able to give out your product.
One of the biggest advantages that smart contracts possess over conventional agreements is that an result is executed immediately after the contract’s terms are met. There is no requirement to wait for a person to perform the action. In other words, smart contracts do away with the requirement to trust.
For instance, you could create a smart contract that holds money in an the escrow of a child, permitting them to withdraw the funds at a certain date. If they attempt to withdraw the money before the date specified the smart contract won’t be able to execute. It is possible to create a contract that provides you with a digital copy of the title to a car when payment is made to the dealership.
Human factors are one of the main causes that can cause a contract to fail with traditional clauses. For instance, two judges might interpret a conventional agreement in different ways. Their interpretations could result in various decisions being made and results that are different. Smart contracts eliminate the risk of multiple interpretations. Smart contracts instead execute precisely on the basis of the conditions that are written in the contract’s code. This ensures that, given identical conditions that the smart contract will give the same outcome.
Smart contracts can also be useful to audit and track. Because Ethereum smart contract is part of an open blockchain that allows anyone to instantly keep track of asset transfers as well as other relevant information. You can verify who sent money to your account, for instance.
Smart contracts also help protect our privacy. Because Ethereum can be considered a pseudonymous system (your transactions are tied to a unique cryptographic account but not your real identity) it is possible to shield your privacy from a broader audience.
Like contracts, you can look up what’s included in an intelligent contract before when you decide to sign (or else engage to it). The best part is that the public disclosure of the terms in the contract allows anyone can read it.
Use cases for smart contracts
Smart contracts are programs run by computers that reside within the blockchain. They are able to run on their own. You can keep track of their transactions and anticipate how they behave and even use them in pseudonymous ways. That’s cool. But what do they work for? They can accomplish anything that other computer programs are able to do.
They are able to perform calculations and make currencies and store data, mint NFTs communicate with each other, and even create graphics. Here are some well-known, real-world examples: