Table of Contents
You might have come across the words “Smart contract” in the crypto and web3 space, and you’ve probably wondered what it means. This article will look at smart contracts and how they work.
What Are Smart Contracts?
Smart Contracts are a set of computer codes and protocols that run on blockchain technology and are made up of pre-defined rules established with the approval of the involved parties.
The Code and its agreements exist on a decentralised and distributed blockchain network. The code controls the execution, and the transactions are traceable and irreversible.
How Do Smart Contracts Work?
Computer scientist and lawyer Nick Szabo first proposed smart contracts in 1994.
Szabo described smart contracts as computerised transaction protocols that execute the phrases of a contract. He wanted to increase the capability of digital transaction methods, including POS (factor of sale), to the virtual realm.
Smart contracts are written in various programming languages such as; Solidity, Web Assembly, and Michelson. On the Ethereum network, the code for each smart contract is stored on the blockchain, so any interested party can review the contract code and current status to verify its functionality.
When a smart contract receives funds from a user, all nodes in the network execute its code to reach a consensus on the outcome and the resulting value stream.
This enables smart contracts to be executed securely without a central authority, even when users perform complex financial transactions with unknown entities.
Once deployed onto a blockchain, they typically can’t be altered, even by their creator. But it’s not always this case. This allows make sure that they can’t be censored or closed down.
Advantages of Smart Contracts
- Blockchain transaction records are encrypted, which makes them very difficult to hack. In addition, due to the fact every report is hooked up to the preceding and next records on an allotted ledger, hackers might adjust the whole chain to alternate a single report.
- Because no third party is involved and encrypted transaction records are shared between participants, there is no need to question whether information has been altered for personal gain.
- It disposes of the need for intermediaries to deal with transactions and, through extension, their related time delays, and fees.
- Once a situation is met, the contract is carried out immediately. Because they are virtual and automated, there’s no office work to process and no time spent reconciling mistakes that regularly result from manually filling in documents.
What Crypto Has Smart Contracts?
A smart contract can be created and deployed to a blockchain through anyone. Their code is transparent and can be verified publicly, this means that any involved party can see precisely what logic a smart contract follows whilst it gets digital assets.
Smart contracts allow developers to create a variety of decentralized tokens and applications. They are used in everything from new financial instruments to logistics and gaming experiences and are stored on a blockchain like any other crypto transaction. Once a smart contract application has been added to the blockchain, it generally cannot be undone or modified (although there are some exceptions).