What are smart contracts and how do they work?

smart contract is at the heart of the blockchain revolution, providing the building blocks for decentralized applications (dapps).

simply put:

A contract that is represented as a piece of code that can carry out a series of instructions is known as a smart contract.

The term “smart contract” was coined in an academic paper by Nick Szabo in the 1990s.

Dapps or Decentralized App Audit Services are essentially a series of linked smart contracts.

We are all familiar with apps and app stores. You browse, download the app you want, and you’re done.

Behind the lovely UX and UI of mobile devices, these apps are executing a specific set of instructions laid out by their creators. It can be a game, a calendar, or a way to buy goods and services.

Smart contracts perform very similar functions.

A contract that is represented as a piece of code and created to carry out a set of instructions is known as a smart contract.

However, with smart contracts, there is no middleman. No individual or company holds or verifies your information. Blockchain verifies and saves information for you.

This is the blockchain of the future, according to Buterin and the Ethereum community. Smart contracts are the equivalent of crude oil in the business sector, if Bitcoin is the gold of that industry.

How do smart contracts work?

Let’s imagine a traditional online transaction without smart contracts. Say you want to buy a car online. For this you need:

A website that lists all the car info you want to see

A way to communicate with sellers

A payment system that lets you exchange currency after finding your car

Ability to get a refund if the car proves to be a dud

How to register a change in car ownership with the authorities

A certain amount of trust between you and the website or service in question is necessary for each of these elements. Also, each part of the process is often controlled by a different company or individual.

It doesn’t take much effort for a sneaky person or organization to interfere with any of the above elements, disrupting or canceling the entire process.

Smart contracts can eliminate the need to trust multiple parties in the purchase process.

Why? Smart contracts are:

Security: They use cryptography to prevent changes to records.

Transparency: Everyone can see what a smart contract is and what it is for.

Free for third parties: Smart contracts do not require a middleman to verify. Blockchain does it for you.

Autonomy: They work automatically, so there is no need to wait for human intervention.

Accurate: Because smart contracts are written in code, they have fewer grey areas than written or spoken language.

If this happens, do this

Often, at the core of a smart contract, you’ll find a mechanism (in computer code) “if this happens, then do it”.

These already exist today. Say you want to pay with a debit or credit card. The software your bank runs will use the “If this happens, do this” feature in the following ways:

If the amount in the bank account is greater than the requested amount, release the funds.

Do not release funds if the amount in the bank account is less than the requested amount.

The difference with smart contracts is that instead of the bank (or any third party) as the controller of that decision, the blockchain makes the decision.

Applying the aforementioned example to a blockchain-based smart contract will result in the following:

If the amount in the digital wallet is large and has not been used, release the funds.

Do not release funds if the amount in the digital wallet is small, or already used.

The exciting thing about smart contracts is that it means that anyone can come to an agreement with anyone else, and the blockchain records the whole thing.

Inside the smart contract

Like regular contracts, smart contracts are designed to enforce the terms of an agreement — whether it’s a cryptocurrency exchange, tokenized rights, proof of identity, Dapp auditing activities or anything else.

When particular criteria are satisfied, smart contracts are automatically carried out. Three key phrases may be used to succinctly illustrate how a smart contract functions:

Interconnectivity: Each smart contract typically has a limited set of functions. Multiple smart contracts can be set up to connect with each other, and more complex arrangements can be formed called decentralized applications (dapps).

Objects: These are the signers that interact with the smart contract and its body, which are modified by the smart contract according to pre-defined or newly submitted terms.

Environment: Smart contracts depend on the underlying cryptographic environment. This ensures that they can operate safely and that the data they act on is immutable and generally transparent.

For most blockchains, the underlying code of a smart contract is immutable. However, some blockchains also support updatable smart contracts.

Who created smart contracts?

like the ones used to power most cryptocurrencies blockchain technology Again, smart contracts are derived from earlier technologies, which are not quite complete. As far as smart contracts are concerned, they are derived from early electronic instruction execution programs that used “if/else” statements and other conditional logic to automatically produce results based on the information provided.

The term “smart contract” itself was coined in the 1990s in an academic paper written by renowned computer scientist and cryptographer Nick Szabo, who was also responsible for developing one of Bitcoin’s earliest predecessors, the Bitcoin Gold. Szabo initially described smart contracts for a variety of basic purposes, such as reducing fraud and enforcing contractual arrangements, however in a 1996 study, the technology’s potential use cases were broadened to cover digital money, smart property, and more.

Ethereum implements a Turing-complete language on its blockchain, allowing complex and complex logic to be implemented in its smart contracts.

How do dapps use smart contracts?

Dapps or decentralized applications are best thought of as a bunch of bundled smart contracts.

Individual smart contracts can only be used for one type of transaction. However, a dapp can bundle multiple smart contracts together to do more complex things.

A dapp can also put a friendly interface on top of the contract — just like apps do today.

some famous dapps

MakerDAO — A decentralized finance (DeFi) dapp that enables users to lend and borrow cryptocurrencies without the need for a middleman.

Uniswap — Ethereum-based exchange that allows anyone to swap ERC-20 tokens.

Axie Infinity — a money-making game where players collect and breed monsters represented by NFTs and fight them.

Argent — An Ethereum wallet that uses smart contracts to abstract concepts like addresses and private keys.