Blockchain technology brought the world a way to record data in a transparent and immutable way. This technological breakthrough was the first stepping stone for the majority of cryptocurrency projects that exist today.
The next big hurdle was how to add versatility to the blockchain. The invention of smart contracts answered the question.
What are Smart Contracts?
At their core, smart contracts are self-executing code that enforces a contractual clause between parties. They come in the form of decisions, data storage, payments, services, or anything else that a user can think up that requires an agreement.
The creator of the smart contract sets the parameters of the agreement, and the code verifies and executes the agreed upon terms. The smart contract resides in blocks on the blockchain, where each party can interact with it.
Smart contracts are tamper proof because they are part of a given block; therefore they inherit the security of their respective blockchain.
Here’s an example: Bob rents his apartment to John. Bob creates a smart contract on the Ethereum blockchain to invoice John for his monthly rent. On the date specified, John receives the invoice and pays the amount to the contract. The transaction is recorded on the blockchain. Both Bob and John can see the amount spent through a transaction ID, so there aren’t any disputes.
Smart contracts differ from their traditional counterparts by not requiring intermediaries. Traditional contracts require an array of intermediaries to prove or disprove an agreement. Lawyers, witnesses, paperwork, and time are all needed to legitimize an agreement.
By not requiring intermediaries, smart contracts are effectively cost-efficient, time-saving, and secure. By residing on the blockchain, smart contracts are fully transparent in the event of a dispute.
Who Invented Smart Contracts & What Can They be Used for?
Ethereum was built with the intention to create a hub for decentralized applications and software, utilizing smart contracts to give developers flexibility within the system.
The list of use cases are endless, but smart contracts have seen most of their use in the form of ICOs (initial coin offering). Ethereum called upon developers to build on its platform, and the call was heard by thousands of developers to launch their cryptographic token.
Besides token creation and payments, governance is a strong suit for smart contracts. Decentralized autonomous organizations (DAOs), governments, and institutions can all benefit from the use of smart contracts.
Smart contract technology is still extremely young, and their full potential is yet to be seen.