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Blockchain

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  • What are smart contracts?

What are smart contracts?

Table of Contents
  • The Basics of Smart Contracts
    • A Simple Example of a Smart Contract
    • An Extensive Example of a Smart Contract
  • The History of Smart Contracts
  • The Advantages of Smart Contracts
    • Making Transactions Secure and Efficient
    • What are Smart Contracts?
  • The disadvantages of Smart Contracts

Have you ever heard of smart contracts? Smart contracts are a type of software that runs on a blockchain. They are like digital contracts that record agreements with specific conditions between two or more parties. All parties can view the contract, but it’s impossible to modify it afterwards. This feature makes it possible for parties to trust the contract and the underlying blockchain technology without having to trust each other. With smart contracts, intermediaries such as platforms like Airbnb, brokers, and notaries can be eliminated.

Think of it like this: you need a contract, such as a loan agreement, a driver’s license, or a purchase document for a house, but you don’t want to involve a middleman like a lawyer or a broker. In that case, you can use a smart contract to establish all the conditions.

The Basics of Smart Contracts #

Smart contracts are a relatively new technology, and you might be wondering how they work. Let’s take a closer look at some basic examples.

A Simple Example of a Smart Contract #

Let’s say party A wants to buy a house from party B. If party A transfers the purchase price to party B, the house is automatically transferred to party A. The transfer is permanently recorded on the blockchain. Of course, there are more factors to consider when buying a house, but this gives you an idea of how a contract with conditions works.

An Extensive Example of a Smart Contract #

Now, let’s consider a more elaborate example. Suppose you want to rent an apartment in Barcelona for a certain period to enjoy the sun, sea, and beach, and you agree to pay in cryptocurrency. A smart contract is created with the agreed-upon conditions, which both parties can view and verify (but not modify!). When you transfer the money, the contract provides you with a digital key that gives you access to the apartment. If you fail to pay or pay late, you won’t receive a key. If you pay late, the amount will be automatically refunded to your account.

Once you’ve paid and received the key, the contract confirms that you can enter the apartment during the agreed-upon period. Afterward, both parties are informed that the contract has expired. This contract includes multiple conditions and outcomes.

The History of Smart Contracts #

The technology behind smart contracts was first described in 1997 by Nick Szabo, a computer programmer who later worked on the development of Bitcoin with the person behind the pseudonym Satoshi Nakamoto. Since then, some people have claimed that Nick Szabo is Satoshi Nakamoto, but Nick has always denied it.

He wanted to develop an electronic ledger to store contracts and give everyone connected to that contract access to the ledger. After blockchain and Bitcoin were accepted by the global financial world as new technologies in recent years, Nick’s technology could be applied, and smart contracts became more and more embedded. One of the most prominent supporters of smart contracts is Vitalik Buterin, the founder of Ethereum, who claims that the technology can be seamlessly added to any blockchain code.

The Advantages of Smart Contracts #

Using a smart contract has many advantages for all parties involved. Everyone has the assurance that the conditions will be executed. Furthermore, the contract can’t be changed once it’s on the blockchain, which means that the parties don’t have to trust each other. When buying a house, for example, you know with 100% certainty that the house will be transferred to your name after payment of the purchase price.

In addition to trust, you don’t need an expensive notary to record everything. This ensures that intermediaries are no longer necessary. It’s therefore much cheaper to use.

Making Transactions Secure and Efficient #

Smart contracts are one of the most innovative and exciting applications of blockchain technology. They have the potential to revolutionize the way we conduct transactions, making them faster, more secure, and less expensive. In this article, we will discuss the benefits and drawbacks of smart contracts, exploring how they can benefit all parties involved in a transaction.

What are Smart Contracts? #

Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist on a blockchain network, making them immutable, transparent, and unalterable. Smart contracts are able to execute automatically when certain conditions are met. They work like a vending machine. Once the user pays the required amount, the item is dispensed automatically without any further human intervention.

Smart contracts offer several advantages over traditional contracts, including:

  1. Increased Trust and Security

One of the biggest advantages of smart contracts is that they increase trust and security. The terms of the contract are written into code and are immutable. This means that once a smart contract is established on the blockchain, it cannot be altered or manipulated. The contract executes automatically when certain conditions are met, which reduces the likelihood of fraud and error.

  1. Elimination of Third-Party Intermediaries

Smart contracts eliminate the need for intermediaries, such as lawyers or notaries, to verify transactions. This means that the transaction process becomes faster and less expensive. Since intermediaries are no longer required, the cost of transactions is reduced, making it easier and more accessible for people who would otherwise be priced out of the market.

  1. Automated Execution

Another advantage of smart contracts is that they can execute automatically when certain conditions are met. This means that once the terms of the contract are established, the contract will execute automatically without the need for human intervention. This eliminates the need for a middleman to oversee the transaction, which speeds up the process and reduces costs.

  1. Always Accessible

Smart contracts are always accessible on the blockchain. This means that you don’t have to worry about losing the contract or having to store it in a safe place. You can access the contract anytime and from anywhere as long as you have access to the internet.

The disadvantages of Smart Contracts #

Smart contracts have some limitations, including:

  1. Inflexibility

Smart contracts are not easily adaptable. Once the terms of the contract are established, they cannot be changed. If any changes need to be made to the contract, a new contract must be created. This could result in additional fees and delays.

  1. Lack of Adaptability to Human Factors

Smart contracts cannot account for unforeseen human factors, such as natural disasters, government intervention, or other issues that may arise. This means that while they are secure and efficient, they may not be suitable for all types of transactions.

  1. Dependence on Human Programming

Smart contracts rely on programming, which is created by humans. This means that there is a risk of coding errors or bugs that could cause problems or even lead to losses. Therefore, it is crucial to have experts in coding and smart contracts involved in creating and executing the contract.

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Updated on March 14, 2023
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Table of Contents
  • The Basics of Smart Contracts
    • A Simple Example of a Smart Contract
    • An Extensive Example of a Smart Contract
  • The History of Smart Contracts
  • The Advantages of Smart Contracts
    • Making Transactions Secure and Efficient
    • What are Smart Contracts?
  • The disadvantages of Smart Contracts

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