A smart contract is a type of self-executing contract, which means that human input is not needed to control the execution and transactions connected to the contract.
Smart contracts are a core part of blockchain technology and most cryptocurrencies. However, the use of smart contracts precedes blockchain technology.
Here is a closer look at smart contracts and how they work in cryptocurrencies.
Table of Contents
What Is a Smart Contract?
The idea for smart contracts first came from a computer scientist named Nick Szabo. Szabo created a virtual currency in 1998, about 10 years before the release of Bitcoin.
He also released a paper describing his theory for the use of smart contracts.
Smart contracts were originally defined as computerized transaction protocols designed to execute the terms of a contract. Smart contracts are essentially computer programs stored on a blockchain.
The contract provides participants with an immediate outcome, instead of requiring one party to wait for verification from the other party or a bank.
How Do Smart Contracts Work?
Smart contracts are comprised of lines of code. The typical contract includes a series of “if/then” statements.
The if/then statements check whether predetermined conditions are met. If the conditions are met, a specific action is executed by the smart contract. The outcome of the action is then automatically updated in the blockchain.
Some smart contracts are simple and only include a few conditions while others are complex and include a series of stipulations and exceptions.
What Are the Benefits of Smart Contracts?
Compared to manual contracts, smart contracts offer a wide range of benefits, including:
- Increased speed and efficiency
- Accurate transactions with no human error
- Enhanced security and fraud protection
- Superior transparency and trust
- Reduced costs for handling transactions
Automating the fulfillment of contracts saves time and increases the efficiency of transactions.
After a condition is met, the contract immediately executes the required action. As the actions are executed automatically, no humans are involved.
Removing humans from the equation eliminates the risk of errors from manual input. Cryptocurrencies rely on a connected network of computers.
When an action is submitted to the blockchain, each computer verifies the transaction and updates a distributed ledger. No one else can modify or delete the records, which increases the security of handling financial transactions.
Executing a smart contract with blockchain technology also provides increased transparency when used for a cryptocurrency. All transactions remain stored in the ledger instead of handled by computer software at a bank.
Smart contracts also eliminate the need for third parties, such as payment processing companies. As no one else can alter the records, smart contracts offer greater trust.
Eliminating intermediaries and payment processing companies also reduce the cost of executing a smart contract. No outside parties are involved, which limits transaction fees and other charges.
Smart contracts remain an essential feature of cryptocurrencies. However, smart contracts are also useful for many other applications. Major organizations are using smart contracts for everything from supply chain management to project management.
In the end, smart contracts may revolutionize the way people handle contracts, agreements, and workflows.