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What are Smart Contracts?

Smart contracts are transactional computer programs that can execute the terms of an agreement automatically with no intervention. They were first proposed by Nick Szabo in the early ‘90s; however, because of technological constraints, they couldn’t function properly. It wasn’t until improvements were made to fundamental blockchain technology that the application of smart contracts became possible.

In terms of blockchains, smart contracts store and execute digital agreements on a blockchain when predetermined criteria are met. Upon making a specific input, the system automatically executes a predetermined and specific output.

Smart contracts can be written in multiple different languages, with Solidity being one of the most popular. But thanks to recent advances in technology, smart contracts can now be written in more traditional programming languages, compiled and deployed on the WebAssembly virtual machine. Not only does this make deploying smart contracts much easier, but it also provides efficiency and speed benefits. You can find out more about this here.

How do smart contracts work?​

Smart contracts have three major functions.

  • They store rules
  • They verify rules
  • They self-execute rules

Smart contracts do this by following simple “if, when & then” statements that are written in programmable code.

Once a specific input criteria is met, a predetermined output is executed. Once this occurs, a network of computers that helped facilitate the transaction, records the transaction on the blockchain where it gets encrypted and becomes immutable.

Why are smart contracts significant?​

Smart contracts,

  • Significantly improve slow, expensive, centralized and insecure transactional processes
  • Enable transactional processes to become more efficient, transparent and autonomous
  • Remove the need for third parties and intermediaries to ease human error and significant time and financial costs

This presents opportunities to automate and streamline industries that are long-winded and in need of more efficient transactional processes.

What are some real-world applications of smart contracts?​

Smart contracts best suit industries where an automatic executing process would be useful. For instance, implementing smart contracts would be great in industries which require an extreme amount of intermediation. This would help automate routine and repetitive processes which individuals currently pay sizable fees for. Processes where the trading of assets is extremely long-winded, like real estate for example, would witness exponential efficiency improvements and other benefits like enhanced security and reduced costs.

To date, smart contracts have been used:

  • In the financial industry to dis-intermediate and decentralize financial services.
  • To change how modern games are played.
  • In the legal industry to automatically execute legally binding contracts.
  • To facilitate complex computational tasks like those involved in machine learning and artificial intelligence.

Will smart contracts enable complete decentralization and automation?​

Smart contracts present more opportunities than simply improving singular transactional processes alone. They also facilitate the creation of completely decentralized applications that run on the blockchain. These decentralized applications, also called dApps, combine easy-to-use interfaces that emulate conventional web applications with the new added possibilities of programmable smart contracts and blockchain technology.

dApps bring major enhancements to conventional web applications. A key highlight is the strong emphasis on privacy and data security, achieved through cryptographic encryption that safeguards and makes data immutable. This ensures tamper-proof records. dApps streamline user interactions with decentralized services, enhancing the overall experience. With hosting on a network maintained by many operators, most dApps boast zero downtime. Eliminating third parties reduces costs and boosts transaction speeds.

Smart contracts also enable more than just applications to run autonomously without centralized control. They also allow entire organizations to function without centralized involvement. These organizations are often referred to as decentralized autonomous organizations (DAOs) and you can think of them as businesses that are run on the blockchain and collectively owned by their community.

DAOs represent a revolutionary new form of corporate governance that enables global collaboration between individuals who do not personally know one another. This means that users no longer need to “trust” each other before they collaborate. Instead, users only need to trust the DAO’s smart contracts, which are completely transparent and verifiable by anyone. DAOs open up new and exciting opportunities for global collaboration and they have the potential to change how institutions are governed worldwide.