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Smart contracts are powerful tools because they cannot be monitored and are not vulnerable to cyberattacks. In multilateral digital agreements, smart contract applications reduce counterparty risk
To make the description very simple, smart contracts are computer programs or protocols designed to automate blockchain transactions. They launch themselves as soon as they are required to meet certain predetermined conditions. Smart contracts execute agreements so that both the seller and the buyer learn about it very quickly and do not need to involve an intermediary.
Smart contracts are contracts that execute on their own, without anyone involved. They work by having the terms of the agreement between buyer and seller initially spelled out in the code. In essence, they are automated computer transaction protocols whose job is to fulfill all contract terms. This makes all transactions traceable, transparent, and irreversible.
As we described before, smart contracts are simple programs that run on a blockchain network and are tamper-proof or tamper-evident. They are programmed to do a specific action when certain events occur. One smart contract can have multiple conditions, and one application can contain various smart contracts. Smart contracts are being programmed in different languages, but the most popular among them are Ethereum’s Solidity and Vyper.
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Any developer can write their smart contract and put it on a public blockchain. For example, to have it transfer funds to the most profitable application.
It can even be an automatic sending of an email or issuing of a ticket. Once the transaction is completed, the blockchain is updated so that no changes can be made. And only parties with permission see the final result. The developer can begin programming the smart contract when the parties have agreed upon all the terms, exceptions, and opportunities to open disputes. Recently, though, organizations using blockchain for business have been offering presets and various online tools to simplify the structuring of smart contracts.
The first person to think of such a helpful thing as smart contracts was computer scientist Nick Szabo from the United States. It was a relatively long time ago — in 1994. In his extensive work, he described a smart contract as “a computerized transaction protocol that fulfills the terms of the contract,” the goal of which is to meet the general conditions of the contract while minimizing all sorts of risks and the need for intermediaries.
The simplest example of a smart contract working is a vending machine. The code in it allows paying a certain amount to get the food or drink the customer has chosen. And also give the change, for example. And in 2009, with the advent of the Bitcoin blockchain
In 2012, the Bitcoin network introduced the possibility of multi-signature transactions. The need for multiple private signatures helped reduce the risks of error, theft of funds, or loss of access. However, using smart contracts on Bitcoin requires knowledge of opcode programming.
Then came Ethereum. This blockchain platform brought programmable smart contracts to light. The Ethereum blockchain could run numerous smart contracts at once.
Full support for smart contracts in the Bitcoin network has been developed by a tool called Rootstock (or RSK). It also uses the Solidity language but can handle up to 100 transactions per second and adds news blocks in time slots of 10 seconds (which is lower than the 16-second time slot in the Ethereum blockchain).
The essential difference between blockchain and the banking system lies in how the user’s funds are processed when a payment is made. That said, smart contracts have several superiorities.
Thanks to smart contracts, it is possible to create, track and grant ownership of specific digital tokens. The token contract programs the functionality of the tokens it issues. For example, holders can receive insurance in a dApp (utility token), vote weight in a protocol (governance token), equity in a company (security token), and ownership of a unique real or digital asset (non-fungible token or NFT).
Decentralized finance (or DeFi) consists of applications that use smart contracts to provide everyone with the usual financial products and services (exchanges, asset management, etc.) and, at the same time, can contain several services and create new financial primitives
Blockchain-based games use smart contracts to protect against cheating and fair distribution models (eliminating the problem of unpredictable loot drops). This applies to limited edition NFTs as well. So NFT players and collectors get a chance to get their hands on the rare digital assets they want.
Smart contracts are also suitable for parametric insurance. It is insurance in which the payout is related only to a specific event. They provide a tamper-proof infrastructure for creating insurance contracts triggered by pre-entered data.
Smart contracts (like everything in this world, unfortunately) have their disadvantages. The blockchain networks in which they operate are isolated. That means they have no connection to the outside world and cannot interact with external systems to confirm the occurrence of real events. For the same reason, they have no access to cost-effective computing resources. The asset’s price may not be known before the transaction takes place.
Therefore, programmable smart contracts with access to real-world data and traditional systems are becoming increasingly popular. They are called hybrid smart contracts. They use secure middleware (oracle) to, for example, trigger a smart contract using outside data or to settle an out-of-chain contract using a traditional payment system.
Oracles connect the inputs and outputs in blockchain to create hybrid smart contracts. They allow blockchain platforms to be linked to familiar systems to create more productive, secure, and confidential smart contracts. By providing hybrid smart contracts, oracles greatly extend and amplify the pros of blockchain, enabling the creation of better digital agreements based on cryptography.
Blockchain looks promising (though not all consider it good for all fields to use). Many areas can be changed by smart contracts: voting, governance, supply chains, healthcare, and real estate. The ability for multiple parties to cooperate without the ability to manipulate or use the system to their advantage, its security, and transparency not only open the way to innovations and cooperation between bodies that were not possible before but also make these procedures much more efficient. But, as already mentioned, smart contracts also have drawbacks and vulnerabilities.
Blockchain and smart contract application development are relatively recent, and there are many nuances associated with them. This is why many look at platforms based on their reputation and their developer status. However, the choice of the blockchain platform is also closely related to how it will be used. And that’s something to consider.
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