Smart Contracts: Everything to Know
By Beluga Research July 7, 2023
- A smart contract is a self-executing computer program that automatically executes predefined actions when specific conditions are met.
- Smart contracts run on blockchain networks, ensuring transparency and removing the need for intermediaries, making them trustless and decentralized.
- A smart contract can be used for a variety of purposes, including financial transactions
- Smart contracts are a critical part of the cryptocurrency ecosystem, used for DeFI, Dapps and NFTs
A smart contract is a self-executing contract programmed to automatically execute when certain conditions are met. A smart contract eliminates the need for a third party like a lawyer or business to oversee performance of a contract. A smart contract operates according to the rules encoded within it.
Smart contracts' advantages include transparency and the fact that they are tamper-proof. Since smart contracts reduce the need for third parties, they can be more efficient and cost-effective than traditional contracts.
A Brief History
Computer scientist Nick Szabo proposed the idea of a smart contract in 1994. Szabo envisioned a digital system that would be able to verify and enforce the negotiation and performance of a contract. However, smart contracts did not emerge until blockchain technology was developed.
Ethereum created the first blockchain-based smart contract in 2015. Ethereum is a decentralized blockchain platform that allows developers to create and deploy smart contracts. Since then, numerous other blockchain platforms have emerged. These include Avalanche, Polkadot and Cosmos. Each has their own features and capabilities.
What is a Smart Contract?
A smart contract is a self-executing contract. A smart contract is built on a blockchain. Smart contracts are designed to automate the execution of a contract. This means lawyers, banks and other third-party institutions do not need to oversee or guarantee the performance of the contract. Smart contracts ensure transparency and decentralization.
Smart contracts can be used for a variety of purposes. For example, a smart contract could be used to automate the payment of rent. The terms of the contract could be programmed to automatically transfer funds from the tenant's account to the landlord's account on a specified date every month.
- Create a smart contract. A user can create a smart contract with a programming language that is specifically designed to generate such contracts on the Ethereum blockchain. One type of language that does this is called Solidity.
- Deploy the smart contract to the blockchain. When deployed, the smart contract then becomes a permanent part of the blockchain's history.
- Access and execute smart contracts. Anyone with access to the blockchain can view and execute a smart contract. The smart contract is like a wallet - but with an address - that users can interact with.
- Use the smart contract to achieve a goal. The purpose of the smart contract is to accomplish a task, like the exchange of a certain amount of one cryptocurrency for another. Smart contracts also facilitate applications like crypto borrowing and lending. Or trading on NFT marketplaces like OpenSea.
- Executes automatically. Once a smart contract is deployed to the blockchain, it will execute when certain conditions are met. For example, a smart contract may execute when a certain amount of cryptocurrency is sent to a specific address or when a defined event occurs.
- Transparency. Since smart contracts are stored on a blockchain, they are visible to anyone with access to the blockchain. This creates a level of transparency that is not possible with traditional contracts.
- Eliminates the need for intermediaries. Since smart contracts are self-executing, there is no need for intermediaries like banks. Usually these parties are present to enforce the terms of the contract. With self-executing contracts, this is not needed.
- Extremely secure. Since smart contracts are stored on a blockchain, they are protected by the same cryptographic security measures that protect the blockchain. After a smart contract has been deployed to the blockchain, it cannot be altered or deleted. Only a new contract can replace it. This changes the way developers have to create and program smart contracts. But at the same time, this also creates a level of security that is not possible with traditional contracts.
- Efficiency . Smart contracts automate the execution of contract terms. This eliminates the need for intermediaries and reduces transaction costs.
- Transparency. Stored on blockchain, smart contracts are transparent, meaning that all parties can access the same information about the contract's execution and the terms of the agreement. The code is available for anyone to review.
- Security. Smart contracts are tamper-proof and immutable. Once they are deployed on a blockchain network, they cannot be altered or deleted without consensus from the network's participants.
- Speed . Smart contracts can execute transactions in a matter of seconds. Traditional contracts can take days or weeks to execute.
- Accuracy . These contracts are executed based on predefined rules. This ensures the terms of the contract are followed precisely.
- Trust . Smart contracts are executed automatically. This removes the need for trust between parties. This feature makes smart contracts particularly useful in situations where trust is difficult to establish, like in international trade.
- Complexity. Smart contracts can be complex to write. They require a high level of technical expertise and attention to detail.
- Lack of Flexibility. Smart contracts are executed exactly as written. This can be a disadvantage if the terms of the contract need to be changed or updated.
- Legal Uncertainty . The legal status of smart contracts are still uncertain in many jurisdictions. This feature makes smart contracts difficult to enforce in a court of law.
- Security Risks . Smart contracts are vulnerable to security risks, including bugs in the code and attacks on the underlying blockchain network.
- Immutability. While immutability is a strength of smart contracts, it can also be a weakness. If a mistake is made in the code of a smart contract, it cannot be corrected without consensus from the network's participants.