The term “smart contract” has been mentioned plenty of times, not only in the crypto world, but the business sector has also embraced it.
In this article, we’ll learn about what a smart contract is, how it works, why it’s important for blockchain and digital assets, and some real-world smart contract examples of how it’s used.
What is a smart contract? Why is it important for cryptocurrency?
Short Answer: A smart contract is a procedure that manages the contract’s terms and conditions and stores them in the blockchain.
A smart contract is an automatic, self-executing contract. The procedure will be carried out by the contract’s terms and conditions. The terms and conditions are stored in the blockchain as a programming code.
Nick Szabo came up with the concept of the smart contract in 1994. He has called this idea a “Computerized Transaction Protocol,” in which the operation is done according to a digital contract. This serves the same purpose as standard contract agreements, such as making payments, maintaining confidential information, and implementing some regulations. Most importantly, the smart contract system does not involve any intermediary entities. This can avoid human error and avoid relying on intermediaries.
What is an NFT smart contract?
Short Answer: NFT smart contracts manage NFT transactions to ensure system’s transparency.
An NFT smart contract facilitates NFT buy-and-sell transactions between an artist and a buyer or collector. The process will be determined by the conditions coded in the automatic system. As a result, we can inspect everything without relying on third parties or centralized systems.
NFT smart contracts enable the network to store all the transaction-related data. Additionally, it ensures system transparency; users can access the information whenever they want. The main functions of NFT contracts are:
- Verifying the ownership
- Handling the transferability
Besides, NFT smart contracts guarantee users that the digital asset they own is unique and unreplicable. This makes each NFT work rare and unique in itself.
How does smart contract work?
In general, smart contracts work on the premise of “If…/When…, then…” A smart contract, in other words, operates based on terms and conditions written in lines of code on a blockchain. The computer network will operate by itself whenever a linked activity occurs.
The steps must begin with partners agreeing on the contract’s terms and conditions. Then, all of the conditions will be translated into Programming Code, showing the steps of that transaction.
This acts as a Condition Statement. These codes will be stored in the blockchain, and the information will be distributed to network computer nodes, ensuring that users have up-to-date information and can monitor the progress of each transaction.
After the information has been verified, the blockchain network will update it. This means that any transactional information cannot be edited and it is only accessible to users of that particular platform.
Smart contract’s pros and cons
Pros of smart contract
- High security – Smart contract information is stored in the blockchain so it is uneditable and unfraudable.
- Quick transactions – It is self-operating. Buyers and sellers can complete transactions quickly.
- Lower cost – Because smart contracts reduce the importance of third parties, costs will as well be reduced.
Cons of smart contract
- Programming flaws – There could be programming flaws in smart contracts that cause errors during transactions. This is also why hackers can attack during the process.
- Not legally enforced – Smart Contract is a novel innovation that is not yet supported by laws. Many people do not understand what it is and there are no laws or regulations in place to support the system. Thus, if something goes wrong, it will directly affect the users.
- Demanding – Users must be familiar with programming languages such as Solidity because it is used to write terms and conditions. If the system is too complex, you may need developers’ help to write Programming Code.
Smart contract examples
Bitcoin was the first cryptocurrency to use smart contracts. Initially, it was only used for Bitcoin network transactions, but one of the developers, Vitalik Buterin, saw the potential to develop smart contracts. He founded Ethereum in 2014 and intended to use smart contracts on his own platform. He made it available to the public as open source code. This is for other developers who want to use and develop smart contracts on their own platforms.
Let’s Take a Look at the Examples of Smart Contract in the Cryptosphere
Smart contracts in finance
Developers utilize smart contracts to make agreements in financial transactions. This is comparable to the standard financial procedure but without third parties involved, such as financial institutions.
Also, as smart contracts are self-executing, this results in an accurate and reliable Decentralized Finance platforms. Users do not need to trust the developers, but rather the code that has been written and can be inspected by all parties involved. Examples are:
- MakerDAO has utilized smart contract to create Dai, a stablecoin from crypto the collateral of the contract between users and the platform.
- Compound (Crypto lending platform) – Smart contract is used as a loan agreement between a user and the platform.
Smart contract in investments
When it comes to tokenization, smart contracts help people invest in some assets in a model called “fractional ownership.” By applying blockchain in the world of investment, it helps to reduce a number of limitations.
There are numerous successful asset investment projects in the digital world today, such as RealT and SolidBlock. These projects enable investors to purchase them with tokens. Furthermore, smart contracts aid in the contracting process. Georgia, for example, used Blockchain to make land title deeds in 2016.
Most importantly, because everything is already recorded in smart contract, utilizing it in asset investment will reduce the cost of the land registration process and hiring third parties, which are usually required in the traditional process.
Smart Contract in DAOs
In 2017, Delaware, the United States, passed Senate Bill 69, which allows business owners to use blockchain. The bill has resulted in the development of DAOs, which act as ownership-holding companies and they also use smart contracts.
DAOs adopt smart contract to enhance the organization structure. This enables the system to reward automatically, lowering project costs. The cost of renting a company, hiring other departments, and so on will also be reduced.
Smart contract in law
Another intriguing case study of smart contracts is in the field of law. Smart contracts can inform business partners about their terms and conditions. It is most commonly used in the form of e-signatures. Smart contracts can be another alternative that can reduce the cost of hiring lawyers or other parties involved.
However, only a few states in the United States have permitted Smart contracts and blockchain in the legal field. Smart contract legal agreements are permitted in Arizona. Or in California, a marriage license can also be done using the blockchain technology.
Examples of cryptocurrencies with smart contract
There are a number of interesting cryptocurrency with smart contracts. See the list below.
Ethereum (ETH)
Ethereum is a type of Open Source blockchain that serves as a platform for a variety of crypto tokens. It operates with smart contracts. It aspires to be a platform for dApps, assisting users in writing codes and developing programs on a global scale.
Cardano (ADA)
Cardano is a Proof-of-Stake (POS) blockchain platform. It is also considered an open source project, contributing to the system’s transparency, security, and fairness. The platform began using smart contracts in September 2021, and it was used with agricultural companies to determine whether or not the products were fresh.
Avalanche (AVAX)
Avalanche is a project that aims to be smart contract-based as it allows transactions to be completed quickly. In this project, three blockchain technologies are combined, resulting in faster and less complicated transactions, lower fees, and scalable transactions.
Cosmos (ATOM)
Cosmos sees itself as the Internet of Blockchains, with the goal of collaborating with each blockchain network. When people switch to smart contracts, working across chains is important. Cosmos intends to build an ecosystem in which each chain can efficiently collaborate.
Algorand (ALGO)
Algorand is yet another cryptocurrency project that seeks to solve financial issues. It intends to serve as a platform for DeFi projects. Algorand sees itself as a CBDC, and it is also used in El Salvador as a blockchain development technology.
In short, dealing with contracts via smart contract can make transactions more convenient and reduce the importance of third parties. Users are encouraged to rely solely on transactions based on computer codes. Smart Contracts are self-operating, secure, and open to verification on the blockchain.
Disclaimer: The information provided in this article is not intended to provide investment or financial advice. Investment decisions should be based on the individual’s financial needs, objectives, and risk profile. We encourage readers to understand the assets and risks before making any investment entirely.
