A Beginner’s Guide to Understanding Smart Contracts
What is a smart contract?
A smart contract is a digital agreement between 2 or more participants which can only be executed after certain conditions have been met. It’s similar to what a contract means in real life. A contract is mostly physical and usually involves a 3rd party for agreement to be achieved.
Smart contracts are mostly put to use in the blockchain sector for now. It aligns with the goal of blockchain technology that is to encourage transparency and trust between individuals and proper distribution and storage of data and monetary value.
The history of smart contracts can be traced to computer scientist and cryptographer Nick Szabo. In 1996, He defined smart contracts as a “set of promises, specified in digital form, including protocols within which the parties perform on these promises”. The theory by Nick was written long before Satoshi Nakamoto proposed bitcoin and blockchain technology.
Bitcoin, which is the first ever cryptocurrency, is not the most preferred smart contract platform because of syntax limitations and scalability problems.
Ethereum, the most popular altcoin which was designed for smart contract functionality, is the most used platform for creating smart contracts. Innovative tools present in ethereum like EVM( Ethereum virtual machine) and easy interface for Application development makes smart contract development easier on the chain.
Smart contracts are not entirely new when you look at certain machines used today, they follow the law or conditions in which smart contracts are built on. The vending machine used in malls and school cafeterias is an excellent example. When you need to get a drink or snack from the machine. All you need to do is meet certain conditions before it is given to you. Those conditions are { select the item you want, put the required amount to purchase it, the machine reads that you have inputted the correct money, and your item is given to you}.
Now that you have seen in real life examples of smart contracts, let’s outline some of the benefits you can enjoy from using them.
Benefits of Smart contracts.
- Smart contracts remove third parties in a given transaction giving room for more trust between individuals.
- They reduce transaction costs and save time.
- Smart contracts can be tracked as they are written in code and mostly open source, which enables other developers to check through the code for corrections and bugs in order to make necessary adjustments.
- Security and immutability: There’s no room for manipulation of contracts, whatever has been agreed on by individuals or an organization is what will be executed. In that way no one can go behind and make corrections to the smart contract.
Smart contracts relevance in DeFi
The bedrock of Decentralized finance is smart contracts. It enables the following use cases to be executed:
Financial services: smart contracts make financial services like lending, borrowing, investment happen without a third party involvement which help save time and make decisions happen faster. Decentralized applications like Uniswap, Pancakeswap, Trust wallet e.t.c
Tokenization of real word assets: assets like gold, metals, copper are incorporated into the blockchain via smart contracts. Users are able to trade,sell and make money using the tokenized versions. With oracles {smart contracts that gather data, information, external systems from web 2 platforms} feeding accurate prices of these assets into the blockchain giving the application more standards.
On chain asset management: just like the
traditional meaning of asset management, same way it applies here in DeFi. A user is able to invest in different cryptocurrency assets and apply different strategies to make sure your portfolio is growing. There’s no account manager handling funds, the smart contract acts in place of that. If you are no longer interested in a particular investment you are able to sell off and convert your token into your preferred asset. This makes managing your assets easier and more flexible.
Conclusion
The benefits of smart contracts in various industries are numerous. Work and our daily lives can be less stressful when things are made in a smart contract form. There is an iota of risk in using them like buggy codes, risk of hackers and wrong code implementation by the developer. These bad sides tend to outweigh the good, however, the importance of smart contracts is inevitable and greatly needed to move to the next phase of innovation and development in the world today.
