If you’ve started researching cryptocurrencies, you’ve probably seen the word smart contracts pop up a few times, especially if you’re interested in Ethereum or any of its rivals.
Curiously, the term ' smart contract ' actually surpasses contemporary cryptocurrency and was first conceived by computer scientist, law scholar and cryptographer Nick Szabo in 1997.
What is a smart contract ?
They are like normal contracts, except they are completely digital and automated and work like a computer program within a blockchain.
When a smart contract executes, it updates the public ledger. However, they require a pre-existing event or events to occur before they can be executed.
Which cryptocurrencies have smart contracts?
Smart contracts were first integrated into cryptocurrency with Ethereum when it was released in 2015.
Now, there are many cryptocurrencies with smart contract capabilities, such as EOS, Neo and Cardano , to name a few.
With Bitcoin, it is also possible to create and execute smart contracts, but they are less sophisticated.
Ethereum is by far the most popular and well-known when it comes to smart contracts. However, its rivals are getting closer and closer to achieving the same performance.
Cardano, for example, operates with two blockchains, one for normal transactions and another specially for smart contracts.
Then there’s Neo, which can be coded in C#, VB.Net, F#, Java, and Kotlin. While Ethereum users will have to learn Solidity, a new coding language specifically for smart contracts.
It’s important to remember that it’s still too early to say which cryptocurrency has the best smart contract functionality. Only time will tell.
How do smart contracts work?
As mentioned above, smart contracts are effectively the same as a normal contract, but they are completely digitized and require pre-existing conditions to be met before they can be fulfilled.
Transactions require ' gas ' to be carried out. This is where a small amount of digital coins are paid to complete the transaction.
When the contract is created and a value is entered, it needs to be mined and when people withdraw from a contract, that also needs to be mined as it counts as a separate transaction.
That said, on blockchains where mining is not required, 'gas' may not need to be paid.
It is possible that different recipients of the smart contract will earn less or more than others as the smart contract progresses. However, this can be avoided so that each person pays the same amount.
Let's look at an example of how a smart contract would work in real life:
Harry is a businessman who wants to hire web developers to build a website for him.
He writes a smart contract on the blockchain for a group of four web developers who have agreed to work for him.
Let's say he is creating an Ethereum smart contract and therefore uses the mist smart contract software.
In the smart contract, Harry will set certain conditions to be met in order for the four developers to be paid.
If these conditions are met, the four will receive what they are entitled to for their work. If these conditions are not met, the payment will be held by the smart contract until completion.
How do smart contracts relate to dApps?
dApps are essentially a connection of smart contracts working together , feeding each other information.
Smart contracts do not necessarily need to contain value. All they simply need to do is be activated when pre-existing conditions are met.
In the case of dApps, when a condition is met and a smart contract activates, it feeds information to another smart contract which will then activate and so on.
What impact can smart contracts have on society?
Smart contracts can be executed and validated, work continuously and never be changed after being created.
Therefore, they can be used by a variety of businesses and institutions for a variety of purposes.
In general, smart contracts can be used to execute real-time payments that require the information to be correct . This makes them very valuable to companies that provide services.
They can also be very useful for buying things from someone else you don't know and therefore don't trust.
A prime example of this is buying a car online, especially a used car, where certain things about the car need to be checked, such as the mileage or the condition of the car, for example.
Let’s look at some of the ways different businesses can benefit from smart contracts.
- Executing a contract to purchase something . This is particularly useful if the transaction has multiple requirements to be met by either party and there is a lot of information involved.
- Banks can use it to grant loans . Borrowers will need to meet certain criteria to obtain loans. Smart contracts will make the process faster and more efficient.
- Postal companies can process payments at the time of delivery . The money can be held in a smart contract until it is confirmed that the delivery has been completed. Once this condition is met, the money can be transferred from the smart contract to the delivery service.
- Crowdfunding . If the targets are not met, the money that was pooled in the smart contract is returned to the original investors.
Smart contracts for insurance companies
Insurance companies can use smart contracts to process claims.
Is it even possible for smart contracts that information is received as a news feed .
This can be useful because if say your house was hit by a natural disaster, like a hurricane, the smart contract will be able to check if that happened through your news feed and see if your address is in the same area.
He can then release the amount that needs to be given to you.
Smart contacts for real estate
It has been suggested numerous times that blockchain technology can revolutionize the real estate market by keeping track of all real estate records on a blockchain.
Smart contracts can make arrangements easier for tenants and landlords . Again, another example of two parties who may not completely trust each other.
It was also highlighted that smart contracts can be used to make multiple share purchases, whereby multiple people can purchase a house or other forms of real estate.
Social credibility requirements
Smart contracts can be set to require a certain level of social credibility .
The more you do things on time, like paying rent, utility bills, or loan payments, the more it can boost your social credit.
With this social credibility, they can get better credit and loans and reduced costs on things like rent.
This can be useful for those who want to rent a property in an area with many people who want to rent the same house. Those with greater social credibility will be able to rent it.
A smart contract for renting a house may have a certain social credibility requirement.
Smart contracts can prevent corruption
No one can simply give more money to someone out of preference as this will be easily visible, especially if everyone is signed up to the same smart contract.
Smart contracts are distributed across the blockchain and validated. It is transparent and can be seen by everyone.
So even if someone was paid additionally outside of the smart contract, everyone will be able to see that.
Smart contracts are also ” immutable ” , which means no one can change them.
To do this, a hacker would need to perform a 51% attack, which is where they gain control of 51% or more of all computers (nodes) on the blockchain and change the consensus.
Do smart contracts work?
While smart contracts are an incredible innovation, they do have flaws.
Since actions are immutable, they cannot be changed. They are recorded on the blockchain and will remain there forever. .
This means that programs that use smart contracts should be very well thought out and written before being put on the blockchain. It may also be a good idea to test them in a separate environment first.
While this makes things safer, it creates a problem when you need to close a contract.
For example, a problem like this could occur if an employee leaves the company and multiple people are on the same smart contract.
One way to update a contract is to use another smart contract that will get the information from the original.
It may also be possible to add an action to a smart contract that will stop it from functioning if certain conditions are met to cancel and nullify it.
Not just for companies
Smart Contracts can also be used by governments and charitable organizations.
One way governments can use smart contracts is allocate funds to different districts of a country based on a census .
This way, when a certain region reaches a certain population, more money can automatically be given to build roads, bridges and other useful infrastructure.
There are also non-profits that are trying to use smart contracts to allow people to rent gardens and rooftops to grow crops in cities.
Other professions, such as lawyers, may also be affected by smart contracts.
Lawyers and others who deal with information transfers will likely need to learn coding languages if they ever need to use smart contracts or hire a smart contract developer.
Or they may not be needed when verifying information as everything will already be on the blockchain.
Why are smart contracts important for cryptocurrency trading?
Because they offer more value behind cryptocurrency.
One of the biggest hurdles cryptocurrency faces is adoption. It needs to be adopted by more and more people before it can be seen as a viable alternative to fiat currency.
There are critics who argue that cryptocurrency is worthless as it is not pegged to anything like gold or the US dollar.
Those critics overlook the fact that cryptocurrency has many different applications . The biggest one is smart contracts and how they can be used gives value to cryptocurrencies.
They can also be a bridge for companies to get involved in crypto.
If they start adopting them for smart contracts and dApps, they may start using cryptocurrency for other payment methods as well.
Theoretically, the more a cryptocurrency is adopted, the more value there is behind it.
Key points
If you remember anything from this article, highlight these key points.
- Smart contracts are like normal contracts . The main difference is that they are digitized and work without an intermediary.
- Several different cryptocurrencies offer features of smart contract . Ethereum, EOS, and Cardano, as well as many others, offer this capability.
- Government organizations and charities can also benefit from smart contracts . If implemented on a large scale, smart contracts will disrupt many industries, hopefully for the better.
- Smart contracts add more value to cryptocurrencies . They offer more to businesses and can help accelerate adoption.