What are smart contracts? How they work and why they matter

If you've started researching cryptocurrencies, you've probably seen the word smart contracts pop up a few times, especially if you're interested in Ethereum or any of its rivals.

Curiously, the term ' smart contract ' actually surpasses contemporary cryptocurrency and was first conceived by computer scientist, law scholar and cryptographer Nick Szabo in 1997.

What is one smart contract ?

They are like normal contracts, except they are completely digital and automated and work like a computer program within a blockchain.

When a smart contract runs, it updates the public ledger. However, they require a pre-existing event or events to occur before they run.

Which cryptocurrencies have smart contracts?

Smart contracts were first integrated into cryptocurrency with Ethereum when it was released in 2015.

Now, there are many cryptocurrencies with smart contract features such as EOS, Neo and cardano , to name a few.

With Bitcoin, it is also possible to create and execute smart contracts, but they are less sophisticated.

Ethereum is by far the most popular and well-known when it comes to smart contracts. However, its rivals are getting closer and closer to achieving the same performance.

5 Best Bitcoins and Altcoins Faucets |→ Free Cryptocurrencies

Cardano, for example, operates with two blockchains, one for normal transactions and one especially for smart contracts.

Then there's Neo, which can be encoded in C #, VB.Net, F #, Java and Kotlin. While Ethereum users will have to learn Solidity, a new coding language specifically for smart contracts.

It is important to remember that it is still too early to say which cryptocurrency has the best smart contract functionality. Only time will tell.

How do smart contracts work?

As mentioned above, smart contracts are effectively the same as a regular contract, but they are completely digitized and require pre-existing conditions to be met before they can be fulfilled.

Transactions require ' gas ' to be performed. This is where a small amount of digital currencies is paid to complete the transaction.

When the contract is created and a value entered it needs to be mined and when people withdraw from a contract this also needs to be mined as it counts as a separate transaction.

That said, on blockchains where mining is not required, 'gas' may not need to be paid for.

It is possible for different smart contract recipients to earn less or more than others as the smart contract progresses. However, this can be avoided so that each person pays the same amount.

Check out:  Is MetaMask safe? how it works? - Learn to use

Let's look at an example of how a smart contract would work in real life:

Harry is an entrepreneur who wants to hire web developers to build a website for him.

He writes a smart contract on the blockchain for a group of four web developers who have agreed to work for him.

Let's say he is creating an Ethereum smart contract and therefore uses the mist smart contract software.

In the smart contract, Harry will set out certain conditions to be met in order for the four developers to be paid.

If these conditions are met, the four will receive what they are entitled to for their work. If these conditions are not met, payment will be held by the smart contract until completion.

How do smart contracts relate to dApps?

dApps are essentially a connection of smart contracts working together , feeding each other information.

Smart contracts do not necessarily have to contain value. All they simply need to do is activate when pre-existing conditions are met.

In the case of dApps, when a condition is met and a smart contract activated, it feeds information to another smart contract that will activate, and so on.

What impact can smart contracts have on society?

Smart contracts can be executed and validated, work continuously and never be changed after created.

Hence, they can be used by a variety of companies and institutions for a variety of purposes.

4 Main applications of Blockchain technology

In general, smart contracts can be used to perform real-time payments that require information to be correct . This makes them very valuable to companies that provide services.

They can also be very useful for buying things from someone else that you don't know and therefore don't trust.

A prime example of this is buying a car online, especially a used car, where certain things about the car need to be checked, like the mileage or condition of the car, for example.

Let's look at some of the ways different companies can benefit from smart contracts.

  • Executing a contract to buy something . This is particularly useful if the transaction has multiple requirements to be met by either party and there is a lot of information involved.
  • Banks can use it to make loans . Borrowers will need to meet certain criteria to obtain loans. Smart contracts will make the process faster and more efficient.
  • Postal companies can process payments upon delivery . Money can be held in a smart contract until it is confirmed that the delivery has been completed. Once this condition is met, the money can be transferred from the smart contract to the delivery service.
  • crowdfunding . If the targets are not met, the money that was pooled in the smart contract is returned to the original investors.

Smart contracts for insurers

Insurers can use smart contracts to process claims. 

It is even possible for smart contracts that  information is received as a news feed 

This can be useful because if let's say your home has been hit by a natural disaster such as a hurricane, the smart contract will be able to check that this has happened via your news feed and see if your address is in the same area. 

Check out:  5 Melhores carteiras para ethereum 2024

He can then release the amount that needs to be given to you.

Smart contacts for real estate

It has been suggested numerous times that blockchain technology can revolutionize the real estate market by keeping track of all real estate records on a blockchain.

Smart contracts can make arrangements easier for tenants and landlords . Again, another example of two parties who may not completely trust each other.

It was also highlighted that smart contracts can be used to make various stock purchases, in which multiple people can buy a house or other forms of real estate.

Social credibility requirements

Smart contracts can be defined to require a certain level of social credibility 

The more you get things done on time, like paying rent, utility bills, or loan payments, the more it can boost your social credit.

With that social credibility, they can get better credit and loans and reduced costs on things like rent.

This can be useful for anyone looking to rent a property in an area with many people looking to rent the same house. Those with greater social credibility will be able to rent it. 

A smart contract for renting a house may have a certain social credibility requirement.

Smart contracts can prevent corruption

No one can just donate more money to someone else out of preference, as that will be easily visible, especially if everyone is signed into the same smart contract.

Smart contracts are distributed across the blockchain and validated. It is transparent and can be seen by everyone.

So even if someone was additionally paid outside of the smart contract, everyone will be able to see that.

Smart contracts are too” immutable ” , which means that no one can change them.

To do that, it would require a hacker to perform a 51% attack, which is where they manage to control 51% or more of all the computers (nodes) on the blockchain and change the consensus.

Do smart contracts work?

While smart contracts are an amazing innovation, they have flaws.

As actions are immutable, they cannot be changed. They are recorded on the blockchain and will stay there forever. .

This means that programs that use smart contracts must be very well thought out and written before they are put on the blockchain. It might also be a good idea to test them first in a separate environment.

While this makes things safer, it creates a problem when you need to close a contract.

For example, an issue like this can occur if an employee leaves the company and multiple people are on the same smart contract.

One way to update a contract is to use another smart contract that will get the information from the original.

Check out:  What is ethereum? How to mine → Guide to buy and sell eth

It may also be possible to add an action to a smart contract that will stop it from working if certain conditions are met to cancel and void it.

Not just for companies

Smart Contracts can also be used by governments and charitable organizations.

One way governments can use smart contracts is allocate funds to different districts of a country based on a census .

In this way, when a certain region reaches a certain population, more money can be given automatically to build roads, bridges and other useful infrastructure.

There are also non-profits that are trying to use smart contracts to allow people to rent gardens and roofs to grow crops in cities.

Other professions such as lawyers, can also be affected by smart contracts.

Lawyers and others dealing with information transfers will likely need to learn coding languages if they ever need to use smart contracts or hire a smart contract developer.

Or they may not be needed when verifying the information as everything will already be on the blockchain.

Why are smart contracts important for cryptocurrency trading?

Because they offer more value behind the cryptocurrency. 

One of the biggest obstacles cryptocurrency faces is adoption. It needs to be taken up by more and more people before it can be seen as a viable alternative to fiat money.

There are critics who argue that cryptocurrency is worthless as it is not tied to anything like gold or the US dollar.

Those critics overlook the fact that cryptocurrency has many different applications . The biggest one is smart contracts and how they can be used gives cryptocurrencies value.

They can also be a bridge for companies to get involved in cryptography. 

If they start to adopt them for smart contracts and dApps, they might start using cryptocurrency for other payment methods as well.

Theoretically, the more a cryptocurrency is adopted, the more value there is behind it.

key points

If you remember anything from this article, highlight these key points.

  • smart contracts are like normal contracts . The main difference is that they are digitized and work without an intermediary.
  • Several different cryptocurrencies offer features of smart contract . Ethereum, EOS and Cardano, as well as many others, offer this capability.
  • Government organizations and charities can also benefit from smart contracts . If implemented on a large scale, smart contracts will disrupt many industries, hopefully for the better.
  • smart contracts add more value to cryptocurrencies . They offer more to businesses and can help accelerate adoption.