What is a smart contract?
A smart contract is somewhat similar to a traditional contract, but with certain key differences. A smart contract is actually a computer program that runs on a blockchain. It automatically executes a set of actions after predetermined conditions have been met. It’s a way for participants to be certain of the outcome of an agreement. It also removes the need for trusted intermediaries and reduces costs and the chance for fraud. The technology also opens up a whole world of new financial tools.
How do smart contracts work?
A smart contract is built on top of the blockchain. A blockchain is the immutable ledger where information and transactions are stored. It’s the base layer of a database and the technology that drives cryptocurrencies like Bitcoin. Smart contracts work similar to sending a transaction on a blockchain network. The smart contract itself is deployed on the blockchain by sending a transaction. The transaction contains the underlying code for the smart contract which is then executed.
Smart contracts work by following if, when and then statements. The smart contract’s code will start once the transaction block is added to the blockchain. They are then stored on the blockchain which means they become decentralized and cannot be tampered with. Transactions cannot be reversed on the blockchain and smart contracts guarantee a certain outcome.
Finally, smart contracts will automatically execute any and all agreements that were set beforehand. The terms of these agreements between different parties is coded into the smart contract. These agreements can be anything, which makes them very flexible in use, but are currently mostly used in financial transactions.
What are smart contracts used for?
Smart contracts can be used for numerous applications in all kinds of industries. Smart Contracts enhance blockchains by introducing automatically executable applications. IBM is currently using smart contracts in supply chain management. The flow of goods is streamlined by automatically triggering the next step when certain conditions are met, such as shipping and delivery. It allows participants to act much earlier if any disruptions were to occur.
Another example is rent. Say you rent an apartment. You could then store the contract as a smart contract on the blockchain. If you pay the right amount of rent on time, you automatically get your apartment key. But if you don’t, the key is withheld. Or if the apartment owner fails to provide the apartment key, you automatically get refunded because one side has not met the predetermined criteria. Such examples can be applied to all sorts of businesses.
Most people currently use smart contracts to trade finance. Especially decentralized finance, or DeFi, is a very popular way to use smart contracts these days. DeFi lets users lend and borrow cryptocurrencies without the need of a trusted intermediary such as a bank or financial institution. The crypto are deposited in a smart contract as collateral and can be borrowed for liquidity by other users who then pay interest.
What is the future of smart contracts?
The idea of smart contracts was first proposed by Nick Szabo in 1994. He attempted to create “Bit Gold,” in 1998, 10 years before Satoshi Nakamoto even created Bitcoin. People have often wondered if he is Satoshi himself, but he has always denied that.
In 2013 Vitalik Buterin wanted to introduce the idea of smart contracts on Bitcoin first, but was met with heavy resistance and his proposal was not accepted. So he, and several other now well-known people in the industry, decided to create Ethereum. In 2015 Ethereum introduced smart contracts for the first time, they are typically written in a Turing scripting language called Solidity.
Since then smart contracts have grown to become one of the most popular applications of the cryptocurrency industry and this might very well still only be the beginning. In 2020 decentralized finance (DeFi) exploded, which lets users borrow and lend crypto through the usage of smart contracts. In 2021 another new market has made waves, namely the non-fungible token (NFT) market. In contrast to regular crypto, each NFT is unique and non-fungible, which gives them completely new functions such as proof of ownership for digital artwork or other items. NFT’s are typically minted through smart contracts. Who knows what other functionalities talented developers will think of in the future with smart contracts?
It comes as no surprise then that blockchain and smart contract developers are currently highly sought after and you can find many such open vacancies on Blockchain4Talent. Take a look at our blockchain developer jobs page to find something just for you.