What is Smart Contract in Crypto: Smart Contracts Explained

Smart contracts are digital agreements embedded in a blockchain, which automatically execute when pre-established conditions are fulfilled. They are primarily utilized to streamline agreements, ensuring all participants can trust the outcome without the need for intermediaries or time delays. Additionally, smart contracts can automate workflows, triggering subsequent actions when the predefined terms are satisfied.

• Smart contracts consist of scripts that automate transactions between two parties.
• They do not include legal language or agreements—only code that executes when specific conditions are met.
• Nick Szabo, an American computer scientist who proposed Bit Gold in 1998, described smart contracts as computerized transaction protocols that implement contractual terms.

Nick Szabo, an American computer scientist, first introduced the concept of smart contracts in 1994, and in 1998, he envisioned a virtual currency known as “Bit Gold,” ten years before the advent of Bitcoin. Though many speculate Szabo to be Satoshi Nakamoto, the anonymous creator of Bitcoin, he has denied these claims. Szabo’s definition of smart contracts is a computerized protocol that enforces the terms of a contract.

He sought to enhance the functionality of electronic transaction systems, such as points of sale (POS), to operate in a digital environment. In one of his papers, Szabo suggested implementing contracts for synthetic assets by merging derivatives and bonds. He wrote, “These new securities are created by combining bonds and derivatives (options and futures) in a variety of ways. Extremely complex payment structures can now be embedded into standardized contracts and traded at low costs, thanks to computerized analysis of these structures.”

Many of Szabo’s predictions materialized before blockchain technology emerged, as seen in the prevalence of computerized derivatives trading.

Smart contracts operate on simple if/when…then… logic embedded within code on a blockchain. A network of computers carries out the necessary actions once the predetermined conditions are verified. These actions can include disbursing funds, registering assets, sending notifications, or issuing tickets. Once the transaction is complete, the blockchain is updated, ensuring that it cannot be modified, and only authorized parties can access the results.

Participants can include as many stipulations as required to ensure the satisfactory completion of a task. Establishing terms involves defining how data is represented on the blockchain, agreeing on rules, exploring exceptions, and determining dispute resolution processes. Smart contracts can then be programmed by developers, although many organizations now offer templates, web interfaces, and tools that simplify the process.

Smart contracts empower developers to create a diverse range of decentralized applications (dapps) and tokens. These contracts are integral to various innovations, from novel financial solutions to logistics systems and immersive gaming experiences. Like other cryptocurrency transactions, they are stored on a blockchain, and once a smart-contract-based app is implemented on the blockchain, it generally becomes immutable (though there are some exceptions).

Applications powered by smart contracts are commonly referred to as decentralized applications or dapps. These include decentralized finance (DeFi) technologies, which aim to revolutionize the banking industry. DeFi apps enable cryptocurrency users to perform sophisticated financial operations—such as saving, lending, and obtaining insurance—without the need for banks or traditional financial intermediaries, all accessible from anywhere in the world. Some notable current smart contract applications include:

• Uniswap: A decentralized exchange that uses smart contracts to allow users to trade specific types of cryptocurrencies without a central authority dictating exchange rates.

• Compound: Compounds are smart contract platforms that leverages smart contracts to let investors earn interest on their assets, while borrowers can instantly access loans without involving a bank.

• USDC: A cryptocurrency pegged to the U.S. dollar via smart contract, maintaining a value of one USDC to one U.S. dollar. USDC falls into a newer class of digital currency known as stablecoins.

To show how you might utilize these smart contract-powered tools: imagine you possess some Ethereum that you wish to trade for USDC. You could deposit your Ethereum into Uniswap, which, via a smart contract, automatically identifies the best exchange rate, completes the trade, and sends you your USDC. Afterward, you could invest some of your USDC in Compound to lend to others and earn an algorithmically determined interest rate—all without the need for a traditional bank or financial institution.

In conventional finance, currency exchanges are often costly and time-consuming, and lending money to strangers across the globe is neither simple nor secure. However, smart contracts make these transactions, and many others, seamless and secure.

Some of the benfits of smart contracts are: Speed, efficiency, and precision
When a condition is fulfilled, the contract is executed instantly. Since smart contracts are digital and automated, there’s no paperwork involved, reducing errors and eliminating delays caused by manual processes.

Trust and transparency
With no third party involved and encrypted records shared among participants, there’s no reason to doubt the integrity of the information, as it cannot be tampered with for personal gain.

Security
Records on the blockchain are encrypted, making them challenging to hack. Moreover, because each record is linked to the previous and next, any attempt to alter a single record would require modifying the entire chain.

Cost savings
By eliminating the need for intermediaries, smart contracts reduce transaction times and associated fees.

Explore how businesses benefit from smart contracts in active blockchain solutions:

Safeguarding the efficacy of medications
Sonoco and IBM are using smart contracts to enhance transparency in the pharmaceutical supply chain, addressing challenges in transporting life-saving medications. Pharma Portal, powered by IBM Blockchain® Transparent Supply, is a blockchain-based platform that monitors the temperature-controlled shipping of pharmaceuticals, providing reliable and accurate data across multiple stakeholders.

Increasing trust in retailer-supplier relationships
The Home Depot employs smart contracts within a blockchain to swiftly resolve disputes with vendors. By facilitating real-time communication and offering greater visibility into the supply chain, the company has strengthened relationships with suppliers, freeing up time for crucial tasks and innovation.

Making international trade faster and more efficient
Through participation in we.trade, a trade finance network powered by IBM Blockchain, businesses are fostering trust in global trade. This blockchain-based platform simplifies trade by employing standardized rules, reducing risk, and offering seamless trading opportunities for companies and banks involved.

In conclusion, smart contracts are pieces of code written onto a blockchain to execute agreements made between two parties without the need for an intermediary. By automating these processes, smart contracts remove the necessity for trust and third-party involvement.

What is a Smart Contract in Cryptocurrency?

A smart contract is a self-executing digital contract with the terms of the agreement directly written into code. It runs on blockchain technology and executes automatically when certain conditions are met.

How Do Smart Contracts Work?

Smart contracts operate using if/when…then… logic. Once pre-defined conditions are met, the contract triggers specific actions, such as transferring funds or updating records, without the need for intermediaries.

What Are the Benefits of Using Smart Contracts?

Smart contracts provide speed, efficiency, and transparency. They eliminate the need for intermediaries, reduce costs, and ensure secure, tamper-proof transactions.

What Are Some Real-World Uses of Smart Contracts?

Smart contracts are used in various sectors, such as decentralized finance (DeFi), supply chain management, real estate, and gaming. They enable peer-to-peer financial transactions, automate business processes, and ensure transparency in supply chains.

Which Cryptocurrencies Support Smart Contracts?

Popular blockchains that support smart contracts include Ethereum, Binance Smart Chain, Cardano, Solana, and Polkadot, among others.

What Is the Role of Smart Contracts in DeFi?

In decentralized finance DeFi smart contracts are used to create financial services like lending, borrowing, and trading without relying on traditional banks or intermediaries.

How Are Smart Contracts Different from Traditional Contracts?

Unlike traditional contracts, smart contracts are automated and execute actions without human intervention. They don’t involve legal language but rely solely on code to enforce the agreed terms.

What Are Examples of a Smart Contract?

A straightforward smart contract example would be a transaction between a customer and a business, where the smart contract processes the payment and triggers the shipment.

What is the Purpose of a Smart Contract?

The main goal of smart contracts is to eliminate the need for a third-party intermediary when executing actions between parties that lack mutual trust.

What are the Four Elements of a Smart Contract?

The specific components depend on the smart contracts blockchain used, but generally, smart contracts consist of state variables (data), functions (defining actions), events (messaging), and modifiers (specific user rules). Some smart contracts may include additional features depending on their purpose.