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If you’ve been following cryptocurrency communities for a while, you’ve likely come across the term ‘Smart Contract’. But do you truly understand what a Smart Contract is?

After reading this post, you’ll gain a clear understanding of Smart Contracts, their unique characteristics, as well as their benefits and drawbacks.

So, What Exactly Is a Smart Contract?

Let’s start with a bit of history. Back in the 1990s, Computer Scientist, Lawyer, and Cryptographer Nick Szabo introduced the concept of smart contracts.

He envisioned them as self-executing contracts similar to interactions with a vending machine, where users input data or value and receive a predetermined item in return.

This concept was later adapted to decentralized ledgers, which became known as Smart Contracts.

In essence, a Smart Contract is a piece of computer code that involves multiple parties and operates atop a Blockchain. It functions much like a traditional contract written on paper, with multiple parties agreeing to certain terms or conditions. However, Smart Contracts are coded using computer language and executed on the Blockchain.

By leveraging Smart Contracts, parties can automate and streamline various transactions and agreements, thereby reducing the need for intermediaries and enhancing efficiency.

How Smart Contracts Work?

To begin, a user writes Smart Contract code directly onto the blockchain.

Next, the contract operates on a node within a network to ensure the contract executes as intended.

Although the parties involved in the contract may remain anonymous on public ledgers, the contract and transactions are recorded.

If the parties meet certain criteria defined in the contract, such as a due date, expiration date, or strike price, the contract is automatically executed.

Hence, the data from the smart contract is visible on the public ledger, allowing anyone to monitor the activity, while still enabling individual parties involved to protect their privacy.

In comparison to real-world contracts, smart contracts possess distinct characteristics. They can be automatically self-executing, self-enforcing, or both.

Example of a Voting Smart Contract in Solidity.

Characteristics of Smart Contract.

Self-Verifiable.

The self-verifiable nature of smart contracts sets them apart from traditional written contracts.

For example, consider the process of purchasing land or a house. This typically involves extensive paperwork and intermediaries such as lawyers, courts, and agents, and can take a significant amount of time.

However, if a smart contract is involved in the acquisition process, the entire process becomes much simpler. There is no need to verify land documents, as the data about the land is already stored on the blockchain and utilized by the smart contract. After transferring funds to the owner, the smart contract updates the owner’s status in the record.

Self-Executable.

Smart contracts operate on the principle of “If This, Then That.” This means that once the specified criteria outlined in the contract are met, the contract is executed. If the criteria are not met, the contract remains unexecuted.

For a clearer understanding, let’s revisit the example of purchasing land.

If the real owner of the land fails to provide the required information, the smart contract will not execute. Similarly, if you fail to transfer the agreed-upon funds, the smart contract will not execute either.

In essence, if any party does not meet the criteria outlined in the smart contract’s code, the contract will not execute. When the criteria are met, the code executes automatically and provides the intended outcome.

Tamper Proof.

Once a smart contract is created, it cannot be altered.

Smart contracts are created on the blockchain, inheriting some of its properties. As we know, data recorded on the blockchain cannot be altered, and since smart contracts are created on the blockchain, their code cannot be modified once added.

These characteristics provide significant advantages to smart contracts, making them widely beneficial in various areas such as healthcare, insurance, IoT, and more.

In addition to mentioning benefits, here is a list of the advantages of smart contracts in different areas.

Benifits of Smart Contract.

Transparency.

As mentioned earlier, smart contracts inherit blockchain characteristics, including transparency.

The entire coding structure of a smart contract is available on the blockchain, providing a clear view of the contract to all involved parties.

This transparency not only reduces miscommunications but also eliminates the chance of disputes.

Safety.

You already know that smart contracts created on the blockchain, utilize cryptography to safeguard data. With automated coding features, smart contracts are considered the safest option in data encryption technology.

Time Saving.

While I mentioned the use of smart contracts in land purchasing, they are also utilized in various other areas to eliminate middlemen, paperwork, and unnecessary steps in processes.

Precision.

Unlike traditional contracts, smart contracts require explicitly detailed coding, leaving no room for errors or missed conditions

Every term and condition must be meticulously included before the contract is executed, ensuring precision in operation.

Trust.

Smart contracts are created with meticulous care, and their manipulation is impossible, instilling absolute confidence in their execution.

Paper Free.

Smart contracts enable paperless activities across sectors, reducing costs associated with paper usage and addressing concerns about global warming by preserving trees.

Storage and Backup.

All the transaction details stored on smart contracts are accessible to all involved parties.

And don’t have to worry about any data losses because data are securely stored on the blockchain, ensuring easy retrieval and no risk of data loss.

Guaranteed Output.

Smart contracts streamline dispute handling by automating processes, and parties using smart contracts commit themselves to abide by the rules and determinations of the underlying code.

These are just some of the benefits of smart contracts, although, like anything else, they are not without drawbacks.

Let’s explore some of the limitations.

Drawbacks of Smart Contracts.

Human Factor.

While smart contracts are meticulously coded to consider all possible outcomes, their creation is still human-driven, leaving room for potential errors.

Once deployed on the blockchain, correcting these errors becomes nearly impossible.

A prime example is the DAO incident, where developer mistakes led to substantial losses for users, with hackers exploiting vulnerabilities to pilfer around $60 million.

Implementation Cost.

Not everyone possesses the coding skills necessary to create smart contracts, as different blockchains employ various coding structures.

As a result, individuals with innovative ideas often need to enlist the expertise of experienced coders, adding to the overall implementation costs.

Uncertain Legal Status.

In many countries, crypto activities are prohibited, posing a potential challenge if governments opt to regulate smart contracts. Uncertainty surrounds the legal framework governing smart contracts, which could impede their widespread adoption and acceptance.

Conclusion.

Smart contracts are indispensable to the crypto sphere, elevating the utility of blockchain beyond mere transactional purposes.

They empower companies and individuals to leverage blockchain technology for their benefit, ushering in a new era of decentralized solutions.

If you found this article insightful, be sure to share it with your family and friends to spread awareness about the potential of smart contracts.