Blockchain technology is the future of the Internet and will become part of our everyday experience. However, you might also be wondering how applications and services can run on the blockchain. This is where smart contracts come into play. With the right smart contract, almost anything is possible.
What is a Smart Contract?
Smart contracts are just like your ordinary contract except that it is written and executed using code. These contracts are executed when predetermined conditions are met. For example, when an employee completes a task, the smart contract will be executed and the salary will be automatically transferred to their wallet.
With smart contracts, all participants can be certain of the outcome without the involvement of a third party. They can also automate a workflow, meaning that the next action will be triggered when conditions are met.
How Smart Contracts Work
The concept of smart contracts was first introduced in the 1990s by Nick Szabo, a computer scientist, and lawyer. He defined smart contracts as computerized transaction protocols that execute the terms of a contract. An example he famously used was a vending machine.
A vending machine is programmed with different outcomes for different situations such as:
- If you insert the correct amount -> it provides your selected item
- If you insert more than the correct amount -> it provides your selected item and the correct change
- If you insert less than the correct amount -> it prompts you for more money
It can automate the sale without the need for a third party or human assistance.
By using “if/when…then…” statements in the code, smart contracts can predetermine the necessary conditions and actions. A network of computers then executes the outcome such as releasing funds, sending notifications, and more. The blockchain is updated once the transaction is complete and parties with the right permissions can see the results.
Participants can include as many stipulations as needed to ensure a satisfactory outcome. To establish the terms, they will need to determine a few things:
- How the transactions and their data are represented
- The rules
- Possible exceptions
- Resolution for disputes
Once everything is ready, a developer can then program the smart contract. As smart contracts continue to become more common, organizations are now utilizing templates, web interfaces, and other tools to simplify the structure.
Benefits of Smart Contracts
How many times have you been frustrated because someone goes back on their word? Or finds loopholes to take advantage of you? Or maybe they take too long to deliver?
These types of situations can be avoided thanks to smart contracts! With smart contracts, you can enjoy:
- Speed, efficiency, and accuracy
- Once a condition is met, the contract is executed immediately
- Trust and transparency
- Encrypted records of transactions are shared to ensure transparency
- By encrypting records, hackers have a much harder time altering it
- No third party/intermediary also means no extra fees
With smart contracts and blockchain technology, many processes (both simple and complex) can be securely automated. You will find that there are several crypto products and services that rely on smart contracts. Looking beyond crypto, there are also opportunities for smart contracts to be utilized, from dispensing medication to paying employees.
Check out more information about smart contracts and their use cases
You should be able to answer all the questions below. If you are having trouble answering any of them, go back and review the lesson & the external content.
- What does a smart contract do?
- How do smart contracts compare to a vending machine?
- When does a developer write the code?
- Can you name three benefits of smart contracts?
- What are two situations in your life that smart contracts will improve?