Smart contracts are a very innovative concept introduced to blockchain technology.
The idea behind smart contracts is to fill gaps in contract law by creating a platform that would allow legal agreements to have functioned from direct computer input. Now, what is a smart contract for, when there’s a peer-to-peer payment system already.
You may have probably wanted to get answers to the aforementioned questions, these are what shall be uncovered in this article.
What Is A Smart Contract?
A smart contract is a computer protocol intended to digitally verify, validate and enforce the negotiation or performance of a contract. It allows the performance of credible transactions that can be reliably completed and disburses funds under the circumstances specified by its code.
It’s a computer protocol that executes the terms of a contract, the logic of which can be written in code. The result of executing the code is that – parties to a transaction can exchange goods, services, or other assets more efficiently and securely.
In the simplest case to answer the question “What Is A Smart Contract”, a smart contract is like an ordinary contract: it specifies what needs to happen in exchange for what. The key difference is that an “ordinary contract” specifies the terms of one side of the exchange while a smart contract specifies the terms of both sides. Smart contracts are often used as part of distributed applications, where they allow money to flow between parties.
Smart contracts allow decentralized autonomous organizations (DAOs) to be created, in which the functions of the organization are executed by smart contracts automatically without third parties.
In the description content, I mentioned: “what is a smart contract for, when there’s a peer-to-peer system -Blockchain already”. Below is the clarification:
Smart contracts take advantage of blockchain technology to remove the need for a trusted third party, such as a bank or government, to mediate and facilitate transactions. The code that runs on the blockchain is what creates trust between the counterparties (buyer and seller), who can verify each others’ identities through their digital signatures and digital certificates.
Component Of Smart Contracts
Smart contracts are a type of computer code that runs on a blockchain and is designed to be self-executing. Smart contracts allow transactions to be executed in a trustless and decentralized way, removing the requirement for a central authority or broker.
Smart contracts have three main components:
- Code: The code is written in one or more programming languages such as Solidity or Serpent, which make up the Ethereum Virtual Machine (EVM). A smart contract’s code is stored on the blockchain, which maintains its integrity.
- State: The state is the current state of variables that your contract keeps track of. For example, if you’re using an ETH address as a source of funds, this would be your balance.
- Storage: Storage is how we keep track of when something happens (such as when a transaction occurs) and what happens afterward (such as what happens if someone sends ethers to your address). The storage is “Blockchain”
Benefits Of Smart Contract
Smart contracts are the next big thing in the cryptocurrency world. They have been described as “smart” because they are self-executing, self-enforcing contracts that can be programmed to execute their functions automatically.
The benefits of smart contracts are:
- Ease of use — No more paper contracts. Smart contracts have the potential to make financial transactions easier and less costly for both parties involved in a transaction. You don’t have to worry about what happens if you don’t sign your name on a contract or if one party doesn’t show up at the agreed-upon time. Smart contracts will take care of everything for you.
- Reduced fraud — Smart contracts eliminate human error by eliminating manual errors and errors caused by misunderstandings that can occur when humans interact with each other online via a computer keyboard or smartphone app interface.
- Reduced risk — Smart contract technology eliminates risk through automatic execution of payment amounts, delivery dates, and other conditions without human intervention. Smart contract technology also eliminates counterparty risk due to fraudulent activity by eliminating counterparty discretion over who gets paid what amount when and how much they get paid.
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Smart contracts are an emerging technology that enables the exchange of value between parties in a decentralized manner. They hold the promise to revolutionize how business is conducted today on both a local and global scale.
The first use case for smart contracts was “Decentralized Finance“. This led to the development of Ethereum, which was built with smart contracts as its core feature.
Likewise, smart contracts can be utilized in any industry including insurance, banking, and financial services, supply chain management, and digital identity management.