With the rise in popularity of cryptography in our world today, it is no wonder there are so many new technologies emerging within that space. Many of these technologies have the ability to change the world as we know it and make it a more functional place. Smart contracts are one of these technologies.
Smart contracts are very similar to regular contracts in the real world, but the main difference is that smart contracts are entirely digital. They are a computer program that is stored on a blockchain. A blockchain is a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.
Smart contracts are used practically as immutable distributed ledgers, meaning they are an unchangeable record of financial accounts that are available to everyone on the network.
A great way to visualize how smart contracts work is by relating them to vending machines because they share many similarities in application. Vending machines are programmed to allow certain actions based on certain inputs and they work fully deterministic.
For example, if you want to buy a chocolate bar and it costs $3 but you only have $2 to put in the machine, no matter what you do you will not get the chocolate bar unless you place the correct amount of money in the machine. Also, if you put in $4 the vending machine will give you the chocolate bar and give you back change in a predefined manner based on the asking price of the item.
Smart Contracts, like a vending machine, store rules such and if the correct amount of money is inserted, you can get a snack of your choosing. Because smart contracts run on a blockchain, there are no third parties involved, the action is fully automated and self-executing. This means that there is no need for an escrow agent, a broker or even a lawyer because it automatically executes.
This will have a huge impact on the world because it changes the way we do business and it allows people to do business together without having to necessarily trust the other person.
Let’s say that two people named Mark and Kai want to trade tokens. The contract says that if Mark sends X amount of tokens A, and Kai sends the same amount of tokens B, then the tokens will be swapped and Mark will receive Kai’s tokens and Kai will receive Mark’s tokens.
To achieve this in the traditional world without Mark having to trust Kai or Kai having to trust Mark, they could make an escrow contract with a third party. This third party would facilitate the process of exchanging tokens by collecting tokens A from mark and waiting for the same amount of tokens B from Kai then giving each person their respective tokens.
However, this approach brings up a few issues, such as trusting intermediaries. With this approach, a person has to rely on the reputation of the intermediary, which is not a deterministic approach. Other than this, smart contracts work fully automated, which is a deterministic approach that makes sure both parties involved get their tokens when the criteria is met. Like vending machines, smart contracts can securely hold funds within themselves which is impossible with contracts in the traditional world.
Smart contracts can make businesses’ more efficient due to their speed. Depending on the intermediary, Mark and Kai could have to wait up to a few days, weeks or even months to settle the transition of their tokens. They also have to run on the intermediaries time. if that intermediary is closed, like many banks are on Sunday, then they cannot operate on those days. Smart contracts solve this problem because they are fully operational 24/7 and a contract can be fulfilled in seconds after the criteria of that contract is met.
Cost is an issue with traditional contracts and that is due to the intermediaries need to make a profit and there can also be other hidden expenses that come with that. However, with smart contracts this is all eliminated, because there is no need for third parties.
Smart contracts are also reusable and this means that anyone can use the same smart contract Kai and Mark used Previously. Since smart contracts are fully digital code, all you would have to do is input your own data and it could be used under the same parameters as the original contract.
In the future there will be many use cases for smart contracts. These uses are not limited to payments, crowdfunding, supply chain and decentralized finance. As innovation in this space continues to grow, we will see many more creative use cases.
Dapps, or “decentralized apps,” will be fueled with the technology of smart contracts. We can imagine a future filled with dapps that do different things, like ridesharing, banking, food delivery, acts as marketplaces and even social media.
In this world companies will not own all of our data and we will be free to engage in transactions directly with one another, without being dependent on a central authority like Facebook or Amazon. That is a more interconnected and cohesive world that can be achieved in our time and with smart contracts we can take a giant leap in that direction.