Okay, so What Exactly Is a Smart Contract?

According to Investopedia, a smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. It is essentially an application layer, developed on a blockchain system, which defines the conditions under which users can interact with the program.

Well, what’s so smart about it, you ask? These coded contracts, when well-written, allow tasks to be executed on the blockchain without individual review or approval by a third party or central manager. If the contract states, for instance, that when the number of users passes 20, two random users must be selected each week as voters, this is what will happen. Once the 21st user joins the platform, two users will be selected at random and displayed to all participants. The selection process will repeat 7 days later, and so on.

This type of automation is what makes smart contracts a great addition to the transparency and immutability of blockchain systems.

But How Does It Work?

Smart contracts were originally developed back in 1993 by cryptographer, legal scholar and computer scientist, Nick Szabo, who likened the contract’s capabilities to that of a vending machine — except digital. This means that once you enter a certain defined input, you can expect a specific, defined output. Since Szabo’s early studies, the introduction of Bitcoin and Ethereum blockchains in the last decade have brought smart contracts closer to mainstream implementation. Satoshi’s Bitcoin is powered by low-level smart contracts, in that the currency is moved around based on select input/output protocols written into the code, however it is Ethereum that brought smart contracts to the forefront.

Ethereum developed a Turing-complete, easy to use, object-oriented programming language called Solidity, which was specifically created to allow for free creation of smart contracts. Influenced by JavaScript, Python and C++ languages, Solidity uses curly bracket, human-readable language to create code that can then be compiled into machine-level instructions, processed and carried out by the EVM (Ethereum Virtual Machine). This system allows the contract parameters to be written to the Ethereum blockchain and executed. Free platforms such as Remix (an open source integrated development environment, or IDE, application that specializes in Ethereum development) are available, allowing users to create and compile code in Solidity to the EVM. Although Ethereum remains the most popular chain for smart contract deployment, others such as Cardano, Neo and Hyperledger also support smart contracts and have their own languages (in the case of Cardano, there’s Marlowe) or use standard, existing programming languages for their contract development.

A smart contract is created with two distinct parts — code and data — which both have an address on the blockchain. The code tells the contract how to function, while the data defines the state of the contract. Since the blockchain is immutable, meaning entries cannot be changed once they are validated, any smart contracts written must be thoroughly checked for accuracy and security before being released. This liability to security failure is one of the biggest weak points of digital contracts and will need to be addressed for long-term, mainstream viability.

What Are Smart Contracts Used For?

Smart contracts are best used in situations where automated, trustless execution of an agreement is required. They ensure that all parties involved can be certain of the expected outcome without needing intervention by a third-party. Some popular use cases include real estate leasing, payment services, supply chain management and digital identity confirmation. Getting rid of intermediaries reduces the cost of transactions like these, as a third-party would typically collect a fee for their services. It also allows processes to be completed more quickly, since the contract can independently execute the agreement at any time, as long as the stipulated requirements have been met. This, as opposed to a series of sign-offs and approvals that may take days to be achieved, not to mention the risk of losing or misplacing paperwork in the process.

These smart contracts also serve as the backbone of decentralized organizations, allowing groups of participants and companies to execute tasks automatically according to their mission and the goals set out. When used most effectively, the smart contract can render traditional hierarchical management structures obsolete. It allows for completely transparent planning and inclusive decision-making through open voting systems.

The capabilities of a single smart contract used in isolation is pretty limited, since it is only able to carry out one transaction (If This, then That), but a series of interlinked smart contracts can execute intricate and complex programming features. NFT smart contracts are used extensively across the gaming industry and in other areas where tokenizing an article — digital or real-life — is useful to track ownership and execute an exchange.

In some places, smart contracts are accepted as legally binding documents, allowing use cases to expand into areas that have traditionally required convoluted legal processes, like will and estate planning, apartment or car leasing and ownership, and more.

Taking things a step further still, blockchain systems and smart contracts can be integrated with other existing and emerging technologies to create even more powerful programs. Artificial intelligence and machine learning, when coupled with the autonomy of smart contracts on the blockchain, can supercharge the development of robot intelligence and perhaps make vehicle sensor response systems more efficient and somewhat more human.

Like all things blockchain, while smart contracts have already made big waves and are showing lots of potential yet, they’re also still a work in progress and have more to prove before achieving mainstream application. The possibilities are truly endless — all that’s left to do is to dive into Solidity or your smart contract programming language of choice and begin creating. With new use cases continuously being developed and increasing complexity being unlocked, there’s no doubt that we’ve only seen the beginning of what smart contracts have to offer.

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