Smart contracts, like any other contract, spell forth the parameters of an agreement or trade. The fact that the terms are established and executed as code running on a blockchain, rather than paper on a lawyer’s desk, is what makes these contracts “smart.” Smart contracts build on the fundamental concept of Bitcoin, namely, sending and receiving money without the need of a “trusted intermediary” such as a bank, to allow safe automation and decentralisation of nearly any form of trade or transaction, regardless of its degree of complexity. They give security, dependability, and transnational accessibility since they function on a blockchain like Ethereum.
Why are smart contracts important?
Programmers may use smart contracts to construct a broad range of decentralised apps and coins. They are utilised in anything from new financial tools to logistics and gaming experiences, and they, like any other cryptocurrency transaction, are kept on a blockchain. When a smart contract application is uploaded to the blockchain, it cannot be modified or reversed (although there are exceptions).
Smart contract-based applications, often known as “decentralised applications” or “dapps,” include decentralised finance (or DeFi) technology, which aims to revolutionise the financial sector. DeFi programmes enable bitcoin users to conduct complicated financial transactions (savings, loans, insurance) without the involvement of a bank or other financial institution and from anywhere in the globe. Among the most prominent smart contract-based applications nowadays are:
- Uniswap: a decentralised exchange that enables users to trade specific kinds of cryptocurrency using a smart contract without any central authority regulating exchange rates.
- Compound: a platform that utilises smart contracts to enable investors to earn interest and anybody in need of a loan to acquire one right away without going to a bank.
- USDC: A cryptocurrency tied to the USD through a smart contract, making one USDC equal to one USD. USDC is a stablecoin, which is a newer kind of digital currency.
How would you then use these smart contract-based tools?
Assume you have some Ethereum that you want to swap for USDC. You could deposit some Ethereum on Uniswap, which would instantly identify the best exchange rate, complete the transaction, and give you your USDC. You may then use part of your USDC on the Compound to lend to others and obtain an algorithmically set interest rate, all without ever visiting a bank or another financial institution.
Currency trading is a costly and time-consuming activity in conventional finance. And lending liquid assets to strangers on the opposite side of the planet is neither simple nor secure. However, smart contracts enable these and many additional possibilities.
How do smart contracts work?
While Ethereum is currently the most popular smart contract platform, they may also be operated on several other cryptocurrency blockchains (including EOS, Neo, Tezos, Tron, Polkadot, and Algorand). Anyone may develop and deploy a smart contract on a blockchain. Their code is clear and publicly verifiable, so stakeholders can see precisely what logic a smart contract follows when it receives digital assets.
- Smart contracts may be created in a variety of computer languages (including Solidity, Web Assembly, and Michelson). The code of each smart contract on the Ethereum network is kept on the blockchain, enabling any interested party to view the contract code and current state to verify its operation.
- Each network computer (or “node”) keeps a copy of all existing smart contracts and their current state, as well as blockchain and transaction data.
- When a smart contract gets cash from a user, all nodes in the network run its code to gain consensus on the conclusion and resultant value stream. This is what enables smart contracts to operate safely in the absence of a centralised authority, even when users conduct complicated financial transactions with unknown organisations.
- To operate a smart contract on the Ethereum network, you must often pay a price known as “gas” (so named since it is what keeps the blockchain operating).
- Smart contracts, once deployed on a blockchain, cannot be modified, even by their inventor. (This rule is not without exceptions.) This ensures that they cannot be restricted or blocked.
