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Today’s Lesson: Smart Contracts - Level: Beginner
What Are Smart Contracts?
Smart Contracts are self-executing contracts expressed as code; created to carry out a specific set of instructions. They can be thought of as advanced “If or when this happens, then do this,” statements. For example:
Person A would like to buy a pen from Person B. We can program a smart contract to check if Person A has the available funds in their wallet, if they do, transfer funds to Person B. Upon receipt, send the pen to Person A. If not, do not execute.
This entire transaction is managed without the need for a 3rd party (another person or company) to verify the funds or to ensure that a pen and not a pencil is sent to person A. The transaction is executed in minutes if not seconds, also, “the code itself is replicated across multiple nodes of a blockchain and, therefore, benefits from the security, permanence, and immutability that a blockchain offers.”
Let’s look at another example by Decrypt:
So, you want to buy a car online without a smart contract. To do so you need:
📇 A listing site to hold the information on all the cars you’d like to see
📯 A way of communicating with sellers
💰 A payment system to allow you to exchange money once you’ve found your car
💳 Some capacity to get a refund if the car turns out to be a dud
👨⚖️ You'll also need to register the exchange of car ownership with the authorities
Each of these points requires you to trust the site or service you’re accessing—and a lot of the time, each part of that process is controlled by a different company or individual.
It wouldn’t take much for a sneaky person or organization to change any of the above, making the whole process void.
Essentially in techie terms, blockchains are the internet, dApps are the mobile and web apps, and smart contracts are the algorithms that power them. However, unlike current algorithms, smart contracts are not controlled by nor do they require a 3rd party to execute. When using smart contracts, code is law.
Think about the many different everyday transactions that this could be applied to:
Buying and selling a house - this could potentially remove the need for lengthy paperwork or even the need for a title company. Titles could exist on the blockchain.
Wills - distribution of assets could be managed by a smart contract and not require a physical attorney.
Pretty much a transfer of anything of value between two or more parties.
Benefits Of Smart Contracts
Secure - security is based on the cryptography of the blockchain.
Trustless - 3rd party middlemen are replaced by code. Parties do not need to trust each other. You can simply trust the code to execute as written.
Available back-up - every node of a blockchain has a copy of every transaction made. This makes them hard to hack or change.
Speed - once conditions are met, smart contracts execute immediately. There’s no time spent processing paperwork.
Autonomous - smart contracts work automatically and there’s no need to interact with anyone but the contact to execute.
Limitations Of Smart Contracts
Difficult to change - generally once the code is launched on the blockchain is it near impossible to chain. In many cases, a new contract is developed to address any significant changes needed.
No grey area - smart contracts are not able to address vague terms. If then statements must be clear and concise.
Irreversible - once executed, a smart contract transaction cannot be reversed. This can be an issue if a transaction is executed in error.
Aside From Crypto What Are Other Potential Use Cases For Smart Contracts?
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