An Introduction To Smart Contracts in the Crypto World

Written by Leo Varnavas - Reviewed by Coin Review Team

Published: Sep 7, 2018 | Last Updated: Oct 17, 2018

Smart contracts are cost-effective, fast and confidential. There is more to know, check out the beginner's guide to smart contracts.

2024-12-06T10:11:28+00:00

When most of us hear the word “blockchain”, our minds usually go to Bitcoin.

In fact, a lot of people still think that Bitcoin and the Blockchains are one and the same. This is of course, a mistake. Bitcoin is a cryptocurrency. Blockchain on the other hand, is the technology Bitcoin and all other cryptocurrencies are built on.

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Cryptocurrencies are just one application of the Blockchain technology. In this article though, we are going to introduce another very important application.

The smart contract.

A little bit of History…

The idea of smart contracts was introduced in 1996 by a computer and cryptography scientist, called Nick Szabo. Szabo saw the digital revolution that was coming.

He realized that the rapid technological innovations that people would experience in the future, would inevitably change the relationships they have. Both in business and in their personal lives.

So, he theorized about the introduction of new institutions and new ways to formalize our relationships in this future environment.

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His theories became a reality in 2015, with the launch of the Ethereum blockchain. Ethereum is today the second biggest blockchain in the world.

It was mainly created by Vitalik Buterin for one reason: Smart contracts.

What is a smart contract?

A smart contract is essentially a piece of code. It holds the rules of an agreement between two or more parties. It also makes sure the agreement is fulfilled. Finally, it executes the terms that the parties agreed upon.

Smart contracts help two or more counterparts to make an agreement directly with each other, without the need of a third party to guarantee the transaction.

By doing so, it allows people to trust a digital contract –a few lines of code actually-, instead of an institution (like a bank), or a human. It’s like a vending machine. You put in a dollar, press a button, and you get your coffee.

If your dollar is in bad shape, you get it back, but no coffee. If you press the wrong button, again, no coffee. As long as you keep your end of the deal, the machine delivers a cup of coffee. This is how a smart contract works, more or less.

Why should I trust smart contracts?

Well, mainly because they possess two very distinct characteristics. The first one is what we call immutability. Because they exist on the Blockchain, it is very hard to change them.

Unlike their physical counterparts (paper or electronic contracts which can be altered a lot easier), you can’t just change smart contracts once they are deployed.

Smart contracts are also, distributed. The moment a contract goes live, every step of it is validated by everyone on the network. Everyone has to agree that step one is fulfilled in order to go to step two.

For example, if the landlord doesn’t get the rent and security payment agreed by the tenant, the contract doesn’t release the code to unlock the front door of the apartment rented. This specific characteristic has another advantage. Nobody can go and change the terms of the deal after its completion.

For example, you can’t just go to the city’s Office of Register and change public records. Because it will take the creation of a new smart contract to change such an agreement, it makes any effort to tamper with it, futile.

Let’s talk about benefits.

Cost

As we said earlier, smart contracts eliminate the need of an intermediary. So, if we don’t need a third party when we are making a deal with someone, the cost of processing and finalizing that deal will be lower.

In some cases, not paying legal, accounting and other fees has a substantial effect on the final price of the underlying product or service.

Freedom

You and your counterpart are the only ones who deal with your agreement. You agree on the terms of your contract, and the network you are on goes ahead and executes it. No one else interferes. No third party needs to give permission for you to proceed.

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Error-Free

Smart contracts are executed automatically. So, if you have reviewed the steps it will follow during its creation, you can be certain that there will be no mistakes. No human errors. Things like “I forgot to go”, or “the traffic was crazy”, are a thing of the past. The contact is always error-free, and nobody can debate that.

Hacker and Bad actor-Free

Since these contracts are distributed among the network of participants, there is no central location to keep them. They are not stored inside a file cabinet, or a computer.

So, without a point-of-entrance or point-of-access, it becomes really hard for anyone to access your documents. If you add the security cryptography offers (a native ingredient of any Blockchain), cracking such a network is an even harder effort for any potential bad actor.

Assurance

Encryption and distribution make sure that any contract you issue is safe. Those attributes also create the feeling of trust to all participating entities, that the contracts they signed cannot be altered by any external party.

Substitute

Smart contracts can be duplicated. As long as they are deployed on the blockchain, they are available at any given time. So, even if a party loses any document attached to the contract, a copy of it is stored, and ready to be used.

Where can we use smart contracts?

The applications for smart contracts are almost as many as the industries we have today and the ones that are not created yet. Collaterals, blockchain mortgages, finance, media, reward applications, health, e-commerce. These are just a few examples of possible uses one can think of.

The most prominent examples though are those of healthcare, banking, and government. Three institutions that affect the quality of our lives every day. In healthcare, we can use contracts and the blockchain to provide access to medical data to doctors all over the world.

So, if you live in Sweden and you get sick in Singapore, your physician could have your whole history in a matter of seconds, without wasting time with telephone calls and emails. You could also have your medical insurance as a smart contract, providing additional data to doctors and all other interested parties with a permission and selective access to your medical history.

In the banking sector, smart contracts can reduce unnecessary costs for all sorts of banking transactions. At the same time, they can serve as a barrier to fraudulent transactions that cost every year millions to banks all around the world and affect the lives of people that fall prey to such criminal activities.

Finally, governments can use them to deliver their services faster, and more efficiently. Without the red tape and the introduction of automation, citizens will be able to receive services and fulfill their obligations a lot quicker.

Smart contracts will also help governments fight fraudulent activities from their employees because they will be able to verify all transactions the moment they occur.

Smart contracts are here to stay. They were introduced as a concept more than two decades ago, but with the evolution of technology and the application of the Blockchain, they are now available to all of us.

They will make our transactions safer, faster, and more efficient. They have obvious advantages over traditional contracts, and their further development is necessary in order to perfect them and make them more flexible. They are not without problems, of course.

For example, it is very difficult (or impossible) to correct a mistake recorded in such a contract. It will most probably have to be declared void and create a new one, an action that could cost a lot of money and work hours. But we are still at the beginning. As Blockchain technology evolves, so do these contracts become better, safer, and error-free.

I am sure that a lot of industries and professional associations will fight to keep them from becoming legal alternatives, but I believe that like all other technological innovations, they will lose. Spectacularly and beyond any doubt. Because you cannot stop progress. It’s that simple.

Image Credits
Feature image: Shutterstock.com
In-Post Image: Shutterstock.com, blockgeeks.com, blockgeeks.com

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Disclaimer

The writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.