Time to read: 6 minutes
Date: January 14, 2023
When it comes to terms for DAOs and blockchain, there are few that are as important as a smart contract. If you’re going to be a member of a DAO, jump into blockchain engineering, or start investing in cryptocurrencies, then the more you know about them the better off you will be! With that said, we’re going to take a look at one of the most important things in blockchain technology, something invaluable to the people that use it. Say hello to smart contracts!
What Exactly is a Smart Contract?
Smart contracts are often used in cryptocurrency transactions to ensure that all parties involved are protected. Smart contracts can also be used to implement functions like voting systems, crowdfunding platforms, or even automatic payments (like cryptocurrency dividends).
Smart contracts can be used for many things, including:
- Tracking property sales and purchases.
- Providing secure voting systems.
- Facilitating digital agreements between parties.
- Allowing people to make payments without third-party involvement.
Smart contracts were first proposed by Nick Szabo in the early 1990s, but they weren’t implemented until the creation of Bitcoin in 2009. The technology was too limited at the time to allow for smart contracts, but as blockchain technology has grown and become more widespread, so have smart contracts and their uses. Smart contracts didn’t become popular until Vitalik Buterin developed Ethereum as a blockchain platform that could execute smart contracts.
How Does a Smart Contract Work?
A smart contract works by using an Ethereum Virtual Machine (EVM) to execute the code written in the programming language of your choice. The EVM runs on the Ethereum blockchain and uses its own cryptocurrency called Ether as fuel for its operations.
The smart contract code is stored on the blockchain and can’t be changed. The code is executed when a transaction occurs, and this triggers the smart contract to perform its function. Once it has been performed, there’s no going back.
A smart contract consists of code that defines the conditions of the contract, such as who the parties are and what they can do. This code is stored on the blockchain, a distributed public ledger that records all transactions that occur on the network. When someone wants to create a smart contract, they must first submit the code to the Ethereum network.
Once the code is submitted and accepted, it becomes part of the Ethereum blockchain. This means that the code is stored in an immutable form, meaning that it can never be changed or deleted. Any changes to the code must be made by submitting a new version of the code to the blockchain.
When two or more parties enter into a smart contract, the code is executed. This means that the conditions and instructions of the contract are carried out. The code is executed on the Ethereum Virtual Machine (EVM), which is a distributed computing platform that runs the code. The EVM is responsible for executing the code and making sure that the conditions of the contract are met.
Once the code is executed, all of the parties involved in the contract will receive a notification about the outcome. If the conditions of the contract are met, the parties will receive the promised funds or assets. If the conditions are not met, the parties may receive a refund or a penalty.
Is There Anything Else I Should Know About Smart Contracts?
You should know that smart contracts are not always secure because they can be hacked just like any other computer program can be hacked if the right tools are used by the right person with the right knowledge of how the program works and what its weaknesses are.
Smart contracts can be used for a lot of things. They are mainly used in the cryptocurrency world, but they can also be used in other industries as well.
They are most commonly used for:
- Financial exchanges and transactions
- Property management and transfers
- Digital identity management and authentication.
- Supply chain management.
Other things that you should know about smart contracts:
- Smart contracts are immutable - Once a smart contract has been deployed, it cannot be changed or amended in any way. This means that errors or bugs cannot be fixed after deployment, and all users must adhere to the agreed upon terms of the contract.
- Smart contracts are transparent - All transactions and details of a smart contract are publicly viewable. This means that all parties involved in the contract can view the details of the transaction, and it also helps to ensure that all parties involved are held accountable and that the terms of the contract are enforced.
- Smart contracts are secure - Smart contracts are designed to be secure and protected from tampering by using cryptographic algorithms and blockchain technology. This means that the terms of the contract are enforced and cannot be changed or manipulated, ensuring the safety of all parties involved in the contract.
- Smart contracts are cost-effective - Smart contracts are much more cost-effective than traditional contracts. They eliminate the need for lawyers and manual paperwork, meaning that the costs associated with traditional contracts are reduced significantly.
What Are Some Examples of Smart Contracts?
- Insurance Contracts: Smart contracts can be used to automate the payment of insurance claims. For example, if a policyholder submits a claim, the policyholder’s smart contract can automatically process the claim and release the payment to them. This eliminates the need for manual claim processing, reduces paperwork, and ensures that policyholders are paid in a timely manner.
- Real Estate Contracts: Smart contracts can also be used to facilitate the sale and purchase of real estate. For example, a buyer and seller can enter into a smart contract that automatically transfers ownership of the property once all the terms of the agreement have been met. This eliminates the need for lengthy paperwork and can speed up the transaction process.
- Employment Contracts: Smart contracts can be used to automate the hiring process. Employers can create a smart contract that includes all the terms and conditions of employment, such as salary, job duties, and benefits. The smart contract will then be triggered when a job seeker applies and can automatically transfer the job offer to the applicant and execute the contract when accepted.
- Supply Chain Management: Smart contracts can also be used to manage the supply chain. For example, a smart contract can be set up to track the movement of goods from the supplier to the buyer. The smart contract can also be programmed to automatically complete the transaction when all the terms of the agreement have been met. This can help streamline the process and reduce paperwork.
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