CryptopediaWhat Are Smart Contracts? How does Smart Contracts work?

What Are Smart Contracts? How does Smart Contracts work?

Smart contracts are usually basic programs that are stored on a blockchain that run when pre-established conditions are met. An understanding between buyer and seller is simply composed of a line of code, the code, and the arrangements contained that exist around a circulated decentralized blockchain network. 

In this session, we will learn all about smart contracts and their characteristics We are going to discuss what are smart contracts then we are going to see how does smart contracts work then we are going to discuss their properties and at the end, we are going to see why smart contracts are so important.

What are smart contracts?

Nick sabo a computer scientist and a cryptographer recognized for his work on digital contracts and digital currency coined the phrase smart contracts in 1997 long before bitcoin was invented. Nick compares smart contracts to vending machines in his article formalizing and securing simple relationships on a public network. The theoretical machine accepts coins and using simple calculations delivers product and change based on the user displayed option, later in his paper, he recommends embedding smart contracts in a number of attributes that may then be managed digitally.

In simple and clear words smart contracts are a set of instructions or a program that runs when certain conditions are met that are defined by a developer. On the blockchain, smart contracts are made and their transactions are completely traceable and these are irreversible which means once it’s done you can’t make any changes to it after it’s created. That’s why it’s secure it’s really hard to hack blockchain data.

How does smart contracts work?

You must be wondering how does smart contracts work, So till now they have the same worth as old traditional contracts but they are somehow different and more secure because it’s irreversible. The main difference is that it’s digital. A smart contract is little a computer program that is stored within a blockchain an example will demonstrate how a smart contract functions. You probably have heard of Kickstarter the popular fundraising tool anyone may use Kickstarter to establish a project, set a funding target, and begin collecting funds from people who believe in their idea.

Kickstarter is simply a middleman between creative entrepreneurs and supporters everyone involved in the financial transaction must have failed within the Kickstarter to handle their money responsibly. So if the project gets financial support then its team anticipates receiving funds from Kickstarter. On the other end supporter wants their money to go into the project if it’s funded or refunded if it doesn’t meet their mentioned object both the product team and its supporters must fave failed in their Kickstarter. However using simple contracts we can create a similar system that does not rely on the third party to evaluate the transaction, everything is entirely dispersed since smart contracts are kept on a blockchain. No one has control of the money when using this method, isn’t it amazing?

Properties of Smart Contracts

We know What are smart contracts and how does smart contracts work. Now we will discuss its properties. Smart contracts can be created in a number of different programming languages including, solidity, web assembly, and Michelson. The code of Each smart contract is stored in the Ethereum blockchain network which allows the allowed participants to inspect the smart contract code and its current state to verify its operations. Along with transaction data and blockchain, every computer on that network has a copy of the existing contract and its current state.

So when a smart contract receives any cash from a user its code is performed by all the computers that are connected to a network to achieve an agreement on the conclusion. That’s how a smart contract executes securely without any central authority even when the user conducts any sophisticated financial transaction with any unknown entity. To create a smart contract on an Ethereum blockchain you have to pay its cost known as a gas fee. These fees help its validators to keep the blockchain running. Smart contracts are irreversible or unchangeable even their creator or developer can’t change them after it goes live on a blockchain.

If we talk about immutability it means that once a smart contract is created it cannot be altered no one can tamper with the code of your contract behind your back, if I say it is distributed it means that your contract’s output value is validated by everyone on the network. A single person cannot compile the contract to release the fund since other people on the network will notice and flag the attempt as invalid. Smart contract tampering becomes nearly impossible.

Why smart contracts are so important? 

Now we are going to discuss why smart contracts are so important and how does smart contracts work. Developers may use smart contracts to create a wide range of decentralized apps and coins, they are utilized in anything new from financial tools to logistics and gaming experiences and they are kept on a blockchain just like any other cryptocurrency in the transaction.

Once a smart contract app is added to the blockchain it cannot be modified or reversed although there are some exceptions. Smart contract-powered apps are also known as decentralized applications or D apps and they include decentralized finance or Diffie technology which aspires to revolutionize the financial industry day free apps enable bitcoin holders to conduct complicated financial activities like saving, lending and insurance without the involvement of a bank or any other financial institution from anywhere in the globe. 

The smart contract-powered applications which are more popular are Uniswap which is a decentralized exchange that allows users to trade various types of cryptocurrency using smart contracts without the need for a central authority to establish the exchange rates. Compound a platform that leverages smart contracts to allow investors to earn interest and borrowers to obtain the loan instantaneously eliminating the need for a bank in the middle. USDC is a cryptocurrency that is linked to us dollars by a smart contract making one USDC equal to one us dollar. USDC is a stablecoin which is a newer type of digital currency.

So how would you put these smart contract-enabled instruments to use, Assuming you have some Ethereum on that and you want to staff for USDC you may put some Ethereum to the Uniswap app which will automatically discover the best exchange rate to conduct the trade and send your USDC via smart contract. You could then invest some of your USDC in a compound to lend to others and earn an algorithmically calculated interest rate all without utilizing a bank or other financial institution. Swapping currencies is an expensive and time-consuming process in traditional finance, it is both difficult and risky for individuals to lend their liquid assets to strangers on the other side of the planet. Smart contracts on the other hand enable both of these possibilities as well as a plethora of others.

Related: Scaling: Why Solana is faster than Ethereum?


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