Blockchain Basics: What is a Smart Contract?

December 1, 2019 2:39 PM UTC

The Blockchain is gaining a ton of popularity and cryptocurrencies like Bitcoin or Ethereum are no longer viewed as digital money with no value.

If you know anything about Ethereum, you have probably heard the term smart contract somewhere. Although it’s only recently that smart contracts have become popular, the term and technology was proposed back in 1994 by Nick Szabo, an American computer scientist.

According to Nick Szabo’s official definition, a smart contract is ‘a computerized transaction protocol that executes the terms of a contract.’

Smart Contracts Explained

In simpler terms, a smart contract is basically an agreement between 2 peers or more and doesn’t require a central authority or third party in order for the contract to be executed. If a smart contract is written correctly, it becomes immutable, no one can access it and change it.

Let’s say John wants to buy Gabriel’s car. An agreement will be formed between John and Gabriel which will be contained in the smart contract. It will look like this: When John pays Gabriel 1 Bitcoin, John will receive the car.

The smart contract will ‘know’ when Gabriel gives John the car. If for some reason Gabriel fails to deliver his part of the contract, the smart contract will simply refund John his Bitcoin.

Using a smart contract saves a lot of time, extra fees and guarantees safety. If John didn’t use a smart contract, he would have needed to pay a third party and trust that party not to run away with his money.

Applications of Smart Contracts

Smart contracts are already being used in real-life situations like in the supply chain management business. Another very popular use of smart contracts is for protecting copyrighted content. They work really well because they are able to record ownership in a decentralized blockchain network that is immutable.

Smart contracts offer many benefits to a lot of different industries and big companies and businesses are noticing it. Although code is not infallible, smart contracts still offer better security than traditional contracts as long as they are verified.

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