3min read
Published on: Mar 15, 2024
#Blockchain
The Ethereum blockchain was the very first blockchain that introduced smart contracts all thanks to Nick Szabo the creator of BitGold.
Today, smart contracts have become a primary building block for various functions in the crypto ecosystem.
These digital contracts have become the building blocks for the DeFi, NFT, GameFi, and other decentralised applications in the crypto space.
They help blockchain developers & creators code arbitrary agreement terms between two or more parties.
They also create automated functions for decentralised exchanges and help in creating both fungible and non-fungible tokens in any blockchain.
One primary function of smart contracts is that developers make use of them to build decentralised applications on blockchains.
This article covers all you need to know about smart contracts and the future of smart contracts in the crypto ecosystem.
Smart contracts are self-operating agreements which are built on a blockchain network and self-execute automatically when basic requirements or predefined conditions have been met by both parties involved in the contract.
Once the transactions are executed, they are irreversible and easily identified.
They give room for trusted transactions and agreements to be done among different, unknown parties without any need for a central authority, or the legal system.
A good example of how this works is how a vending machine works. If a person puts 3$ in the machine and presses a button on the machine that is labelled B2, the machine will dispense the drink in the B2 section.
In other words, if the machine receives the necessary item of value, then it carries out the requested action.
Smart contracts were first proposed by Nick Szabo, an American computer scientist in 1994. Nick was famous for designing a virtual currency called ‘Bit Gold’ in 1998.
However, smart contracts did not become a thing in crypto until the creation of the ETH blockchain in 2015.
Source: Google Images
1. Transparency
With smart contracts, transparency is one of the things that is assured. It is open to everyone in the blockchain network on which it is established.
This means that everyone will be able to see the terms and conditions of the contract together with the changes.
The fact that smart contracts don’t change also helps ensure that no one can go against the terms of the contracts after they have been established.
With the transparency of transactions with smart contracts, credibility is ensured for all participants.
2. Speed of transactions
Smart contracts are completely automated and depend on software logic.
The most important thing is that the benefits of these contracts come from removing middlemen, which means that they do not have to wait for many approvals or manual document processing to complete transactions.
As a result, a lot of time is saved for various conventional business processes.
3. Security
Smart contracts use blockchain technology to facilitate the benefits of security. The structure of the blockchain features links among the blocks with special hashing mechanisms.
This will mean that a hacker will have to change the whole blockchain to alter a single transaction or record.
4. Saves Cost
Cost saving is one of the main benefits here.
For example, businesses don’t have to depend on lawyers, banks, witnesses, or any media to execute contracts or agreements.
Smart contracts will help to avoid the fees for lawyers, bank charges for transactions, and any other costs for processing.
5. Efficiency
The assurance of speed and accuracy in carrying out transactions gives a guarantee for efficiency.
Smart contracts can help encourage more valued transactions for businesses with effective use of time.
6. Sustainability
They are highly sustainable.
They help in shifting plenty of paperwork to the digital space, which in turn saves the paperwork.
1. FinTech
In FinTech, smart contracts help to automate complex documentation and confirmation processes found in finances, thereby making simple procedures by automating payment and repayment tracking.
They have also been important in the rise of decentralised finance (De-Fi) by supporting De-Fi protocols allowing direct peer-to-peer lending and swapping tokens on decentralised exchanges.
2. Supply Chain Management
In supply chain management, these types of contracts make it easy for goods to be tracked from production to delivery.
They make sure that products are authentic and help to battle fake product production, which gives room for impartial trades.
Moreover, they also provide an unchangeable record of transactions, building trust among participants and promoting a smooth global supply chain.
3. Digital Identity
Personal information and private data are secured.
These contracts use cryptographic methods to encode user permissions, ensuring that only people who are authorised can access specific identity information.
4. Real Estate
In real estate, smart contracts enable property transfer, removing too much paperwork and accelerating transactions.
With an unchangeable ledger of blockchain technology, they make it clear as to who owns a certain property. They also promote real estate ventures.
This allows plenty of investors to finance a property project together and share the returns.
5. Gaming & NFTs
Gamers have the potential to experience a new level of player autonomy.
This means they get to make their own choices and are not limited by an intermediary.
The confirmed assets that are owned by gamers in the game.
These assets are represented as non-fungible tokens (NFTs) on a blockchain network.
Efficiency
The biggest benefit is that they run automatically.
Important information can be processed within this instead of waiting for approvals and spending time on paperwork.
They speed up the process of contract execution.
Accuracy
Parties involved are responsible for agreeing on how the smart contract will be running on the blockchain.
Once this is set, transactions will result in accurate output, conforming to the already set rules.
This means that there is no room for human error.
Immutability
As opposed to normal contracts which can be changed, smart contracts cannot be changed or tampered with.
Human Factor & Loopholes
The fact that humans are the ones that code presents the possibility of a faulty code being created. Although this is not a common occurrence, it can still happen.
Smart contracts depend on a programmer to ensure that the code addresses the terms of the contract.
The many loopholes in coding allow contracts to be executed in bad faith.
Ethereum
Ethereum is at the top of the list for smart contract platforms. It is the top platform for developers across the whole world.
Did you know? The platform came up first in July 2015.
What makes this platform special is the degree of support and standardisation it provides.
Recommended Read: Ethereum Explained
Hyperledger Fabric
Hyperledger Fabric is one of the competitors of Ethereum smart contracts. It started in December 2015, and was introduced by the Linux Foundation.
It is a project that is open-sourced and has the goal of supporting blockchain development by using distributed ledgers.
Just like Ethereum, the developers of Hyperledger have designed tools that enable people to create smart contracts easily.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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