What is a smart contract?
Smart contracts are magical computer programs that run on their own. They control, manage, and enforce transactions on their own. Unlike traditional contracts, **smart contracts** manage transactions on blockchain networks, such as Ethereum.
Smart contracts facilitate transactions without a trusted intermediary, such as a bank. They automate the workflow by initiating the next action when existing conditions are met. These contracts are stored on a blockchain through a decentralized network.
Furthermore, a smart contract allows each transaction to be carried out without the need for one party to know the other, thus eliminating the need for a central authority to oversee each transaction. These contracts make transactions transparent, traceable, and irreversible.
How do smart contracts work?
Smart contracts were proposed in the early 1990s by American computer scientist Nick Szabo, who compared this new technology to a digital vending machine, highlighting the similarity of their operation.
When you insert money into a vending machine, it can execute either of two tasks programmed into its system: it can provide you with the item you need along with change, or it can give you your money back, allowing you to make a different selection. Szabo tried to explain how smart contracts work with a simple example.
If a vending machine can automate the process of obtaining an item without a human intermediary, smart contracts implemented using blockchain technology can facilitate transactions in digital form without the need for a middleman. This is an example of a simple smart contract.
The code of a smart contract consists of simple instructions written in a programming language such as Solidity and Web Assembly. These instructions act as a set of instructions and the terms of a smart contract execute any action when the predetermined conditions associated with it are met.
Anyone on the blockchain network can deploy the code of a smart contract, which is transparent and allows for easy verification. This feature allows interested parties to verify the logic that a smart contract uses when receiving digital assets.
Each computer on the blockchain stores a copy of all existing smart contracts along with transaction data. Whenever a smart contract identifies the fulfillment of predetermined conditions, its code checks are triggered by all nodes on the chain, resulting in a flow of value. This mechanism allows a smart contract to perform complex transactions between two parties that do not know each other.
Why are smart contracts important?
Smart contracts enable developers to create a wide range of decentralized applications and tokens, such as Ethereum smart contracts, which are an integral part of the Ethereum network and help in automating various processes that generate multiple benefits creating an overall positive impact on society.
Furthermore, once a smart contract application has been deployed on a blockchain, it cannot be reversed or manipulated in most cases, ensuring security and reducing the risks involved in different types of transactions.
A smart contract can serve a number of different purposes, such as exchanging digital money through applications like Uniswap, Compound, and USDC. Under contract law, a smart contract can be used in the court system, allowing individual users or organizations to form an agreement. You can make your digital signature using these agreements, which saves time and money.
Benefits of smart contracts
Transparency and security
Smart contracts ensure complete transparency as they do not require a middleman to process transactions. Users do not have to worry about information being tampered with and these agreements are effectively encrypted to facilitate secure transactions. This reduces the chances of malicious actors in the building blocks of a blockchain-based platform.
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