Smut contract in simple words
Cryptocurrencies and blockchain have not surprised anyone for a long time. However, the most advanced users of the digital asset world are also flaunting the term "smart contract. Today, we'll take a closer look at what these contracts are and why they are called "smart contracts.
What is a smart contract?
A smart contract is translated from English as a "smart contract". It is a special program that is written in blockchain. The program contains a number of conditions and is executed automatically after all these conditions are met.
That is, In simple terms, a smart contract is a contract that is executed independently, without any intermediaries. To do so, it is enough to fulfill the conditions laid down in it.
Who invented smart contracts?
The idea of smart contracts emerged in the 1990s, and its clear description in 1994 offered Nick Szabo - one of the legends of the cryptocurrency world, which, by the way, according to some crypto-enthusiasts, is Satoshi Nakamoto. However, the digital technology of the time did not have the tools to implement it in practice.
With the advent of blockchain technology in 2008, smart contracts got a second wind. Some elements of it were implemented in the Bitcoin network, but it was limited to the use of basic principles in a very reduced form for security reasons.
But in their full, so to speak, beauty, smart contracts showed themselves after the creation of the Ethereum network, the founder of which Vitalik Buterin saw great promise in their use.
How does a smart contract work?
To understand how a smart contract works, let's take a simple example.
You buy a product online. When you receive it, you find out that it's not quite the quality as advertised. A very long and tedious procedure of returning the poor quality product and your money begins.
The situation looks different if you do not transfer the money for your purchase into the hands of the seller, but to the intermediary. And only after you receive your purchase and confirm to the intermediary its quality, the seller will receive the money.
Blockchain is the intermediary, and a smart contract ensures that the necessary conditions are met.
As you have already realized, the smart contract is recorded in the blockchain, which automatically excludes any changes or adjustments to it. That is, you can receive the goods ONLY if you pay the required amount, and the seller will receive the money ONLY when you are satisfied with the purchase. No other "leaps to the side" are allowed - the contract simply will not be fulfilled.
Smart contract objects
Three key objects can be clearly distinguished in the field of smart contracts:
- Contract Participants. There can be any number of them, starting with two. Each of the participants puts their electronic signature on the contract as proof of their participation.
- Subject of the contract - is, for example, a cryptocurrency or some other digital asset to which the contract has independent access without anyone else's participation.
- Terms of the contract - is a clear and consistent mathematical algorithm required to execute a smart contract.
Where are smart contracts used?
The scope of smart contracts is quite broad. The U.S. Chamber of Digital Commerce (CDC) has identified the 12 most common uses for smart contracts in its so-called White Paper:
- Define partial or complete privacy of your personal data, digital assets, and other things, and control them.
- Systematization of the Uniform Commercial Code, its conversion to digital form, and its automatic updating.
- Exclusion of intermediaries in securities transactions and dividend payments.
- International settlements.
- Control of compliance of goods with standards and certification, which will allow the seller to be fined for products that do not meet the declared quality.
- Maintaining financial records and recording financial data.
- Automate the processing of mortgage payments.
- Property Transfer Procedures.
- Control of the delivery process in real time.
- Car insurance and accident history records.
- Transfer of patient information between clinics.
- Disseminating information about cancer while maintaining confidentiality.
Where do smart contracts come into play?
Smart contracts can be used in several blockchain-based systems. These systems include:
- Bitcoin - In this network, as we said before, smart contracts are implemented in a very reduced version.
- Side Chains - similar to the Bitcoin network, in which the capabilities of smart contracts are slightly extended.
- NXT - open platform, which implements a number of templates for smart contracts. There is no option to create a contract that goes beyond the templates.
- Ethereum - is currently the only platform where smart contracts have the most features. By paying a certain amount in airwaves, any user can create the contract he wants.
The main differences between smart contracts and traditional contracts
Smart contracts have a number of undeniable advantages over the contracts we are used to. We have highlighted the most important of them.
Disadvantages of smart contracts
Despite the fact that smart contracts look like a kind of digital Grail, automatically making all processes honest and transparent, they are not without disadvantages, the main ones are:
- Undefined legal status. It is a consequence of the fact that smart contracts use cryptocurrency, which is not yet an official means of finance.
- Possible errors. A smart contract must take into account all possible scenarios. The more complex the transaction or process, the more difficult it is to put together a proper smart contract.
- Weak PR. Most users do not know or do not understand what a smart contract is and how it can be used.
Despite the shortcomings, the potential of smart contracts is high enough that they will eventually become an integral part of everyday life, becoming an integral part of the world of digital assets and the Internet of Things.
Read about cryptocurrency technology on our website, as well as in Facebook feed!