What Are Smart Contracts?

Smart contracts have been a buzzing conversation for several years among crypto enthusiasts and users. As the industry keeps growing in popularity, the use cases associated with it grow too.

One of the use cases of cryptography is “smart contract”. There have been questions asked about smart contracts, ranging from what it is, how it works, their importance in crypto, and how to develop them.

In this post, you will understand what smart contracts are and their importance.

Brief History Of Smart Contracts

A cryptographer named Nick Szabo, in 1994 introduced the concept of not needing third parties when it comes to transactions. You could record contracts in the form of computer codes, and these contracts are activated automatically.

This discovery eliminates third parties when it comes to transactional deals, thereby enabling the self-execution of contracts that are operated and controlled by computers.

Although his idea was great, he worked on it for years and wrote a book “Smart Contracts: Building Blocks for Digital Free Markets” that aided the process of his discovery.

During the time of his invention in 1994, there was no blockchain technology. A couple of years later, Bitcoin was invented, and it ran on blockchain technology. Also in 2015, Vitalik Buterin created Ethereum, which had the first operational smart contract.

What Are Smart Contracts?

Crypto investors and users have become very curious about smart contracts. Since its discovery in 1994, there has been a skeptical opinion of its workability and the change it brings to cryptocurrency transactions. Although it eliminates third parties in transactions, crypto users seem to not understand what it is.

According to Wikipedia, Smart Contracts are computer programs or transaction protocols that are intended to execute automatically, control, and even document legally relevant actions according to the terms of the contract or agreement.

Its usage is to reduce and even eliminate the need for intermediators, arbitrations and enforcement costs, fraud losses, and also prevent malicious and unintentional exemptions.

Since the inception of Ethereum in 2013, there have been thousands of cryptocurrencies that allow and support the idea of scripting languages which gives room for more advanced smart contracts between untrusted parties.

In addition, smart contracts have laid out terms of an agreement just like any contract. What differentiates smart contracts from other forms of contracts is that their established terms are executed and run on a blockchain.

The Workability Of Smart Contracts

Smart Contracts first began on the Ethereum blockchain, and it was introduced in 2013 in a whitepaper by a Canadian-Russian named Vitalik Buterin.

At the moment, Ethereum is the most popular smart contracts medium but other blockchains such as EOS, Neo, Tezos, Tron, Polkadot, and Algorand can also operate them. Smart contracts codes are transparent and generally verifiable(i.e it can be verified by anyone).

These are the workability of Smart Contracts:

• They are written in a series of computer codes which includes Web Assembly, Solidity, and Michelson. Under the Ethereum network, its code is stored on the blockchain, giving room for anybody to verify the functionality as well as its current state.
• The node stores all the copies of the smart contracts in operation, together with the blockchain and transaction data.
• In order to execute a smart contract on the Ethereum network, there is a payment called “GAS” that needs to be made. The payment enables the blockchain to be operational.
• When a user sends funds to a smart contract, its computer code is performed by all nodes in the network in order to come to an agreement
• When a smart contract is launched into a blockchain, it cannot be modified.

Importance Of Smart Contracts

Smart contracts are useful in various ways. They serve and can as well be used in financial tools like UniSwap, Polygon, etc., as well as in logistics, and gaming, to name a few. Smart contracts give room for blockchain developers to develop and design all kinds of decentralised applications and tokens.

For instance, smart contract-driven applications known as dApps include decentralized finance(DeFi) technology that enables crypto investors to partake in compounded financial dealings such as savings, loans, insurance without the interference of any financial institution such as a bank.

Smart contracts have eased and eliminated third-party issues when it comes to transactions. One of the major importance of smart contracts is that they can be written by anyone and as well be deployed into the network.