An Overview Of Smart Contracts

If you’re new to the world of blockchain technology, you may have heard the term “smart contract” being thrown around. It’s an incredibly important component of Decentralized Finance, so let’s take a deeper look at what smart contracts are and what they can accomplish. 

What Is A Smart Contract?

Smart contracts are self-executing contracts that create an agreement through the use of code. The terms of agreement between two parties are written into lines of code and cannot be changed once the transaction is begun. Essentially, smart contracts allow for secure transactions and agreements to occur between two parties, bypassing the need for a middleman or third party. Why is this so valuable? Oftentimes, the middleman of these transactions has his own terms that must be agreed upon in order to utilize his service, such as the collection of personal data or unreasonable fees. 

Smart contracts are also incredibly secure and “trustless,” in that you don’t need to put your trust in a third party and have faith that they will follow through on their end of the agreement. Every transaction made becomes transparent, traceable, and irreversible. As every transaction on the blockchain is recorded on a public ledger, there is no need for a central authority, legal system, or external enforcement party to regulate activity. Anonymous parties are able to interact and conduct transactions with code acting as the middleman. 

The Emergence of Smart Contracts 

In 1998, an American computer scientist named Nick Szabo invented a virtual currency called “Bit Gold.” Years before, he proposed the idea of smart contracts and defined them as computerized transaction protocols with the capability of executing contracts. His aim was to extend the reach and capabilities of electronic transactions. As various blockchain ecosystems, like Ethereum, have grown exponentially in terms of their usage and public interest, smart contracts have emerged into the spotlight.

Real World Application

We know that smart contracts can facilitate transactions between two parties, but what would this look like when applied to various business models? Let’s say a cargo company were to use smart contracts to automate how they conduct transactions. Once a cargo container reaches its intended destination and it’s confirmed that its contents are intact and untouched using loT sensors, the bill would then be automatically issued. Through the utilization of smart contracts, the possibility of human error is greatly reduced, streamlining the companies’ billing process. 

Another example could take place in the taxi industry. Drivers often complain of taxi companies that take unfair shares of their worker’s earnings, due to the fact that they provide the framework that allows the taxi driver to work. What if there was a way to bypass this greedy middleman and conduct secure transactions in which the worker receives all of their pay? A smart contract would allow for the driver and the customer to agree upon a set destination, route, and payment amount. Once the car reaches point B from point A, the money would be automatically transferred from the customer’s wallet to the driver’s, and the transaction would be complete.