What are Ethereum Smart Contracts?

 

A smart contract is an often-used word in the blockchain. Yet not many know the exact meaning and what it's used for. In this article, we share all about smart contracts in simple words. Keep reading if you want to learn more about smart contracts.

What is a smart contract? 

Smart contracts are programs running on a blockchain that have in-built logic and conditions that changes the outcome. These programs run in a decentralized manner by the nodes on the network. Ledgers are where the smart contracts get stored and replicated in.  

These decentralized calculations were first theorized in 1994 by Nick Szabo. He aimed to make a way of digitizing contracts that could run as codes on a computer.  

Smart contracts quickly became one of the technologies that define the value of the Ethereum network. This was mainly due to Ethereum being a concept for running decentralized applications while other cryptocurrencies aim to be just peer-to-peer digital currency.

 

Examples of Smart Contracts  

There are many uses that a smart contract offers to the Ethereum blockchain. They seem like a complicated topic at first. But when you take a deep look into it, you will see that they are nothing more than an advanced version of logical functions. Below are some examples of these types of contracts. 

 

Legal contracts 

When making a sale, there are several conditions that need to be fulfilled in order to complete the transaction. These commercial contracts are sometimes documented in ways that a normal person would have a hard time understanding.  

Most of the time, these conditions are nothing more than a collection of if, this, then, or that-clauses. If any of the conditions mentioned fails to be completed, the transaction will not go through.  

But when it comes to smart contracts, users do not have to worry about any of that. The contract itself will execute the terms mentioned in all of the nodes of a decentralized network. These are publicly available, and both parties will know about the conditions that go into them. 

 

Smart contracts and bank accounts 

Another great example of a smart account would be a bank account. Bank accounts usually make time-based payments to third parties with your bank balance. The conditions here are the date of payment, if the amount in the account is enough to accommodate the payment, and are there any holds. 

With a smart contract, this can be a very simple task. The conditions mentioned above can be easily checked, and the transaction will go smoothly. The only thing is that this will take place in a decentralized network rather than the bank. 

 

What's with Decentralized Smart Contracts 

Smart contracts are something that functions on a public blockchain and a sharedledger. The shared ledger is accessible to both parties, and they can come to a mutual agreement about the state of the ledger. If most of the network participants are in agreement about the current state of the ledger, there is no reason to disagree with the smart contracts.  

These contracts can be useful in over-the-counter (OTC) derivative transactions as well. These types of direct transactions occur when two parties agree on the trade terms and have no clearinghouse. Most of the time, these take place in financial markets by large institutions. 

Writing of the contract to OTC trades will take place when both parties have access to it under a legal agreement. Even still, misinterpretation of the clauses or disagreement of the external conditions might occur. This is where Ethereum smart contracts step in.  

When it comes to smart OTC contracts, they will run on the blockchain as codes, and no one will be able to edit them after deployment. The chances for any misinterpretation and disagreement will reach 0% when smart contracts get involved.  

Besides the outcome of the trade, smart contracts can also act to move the funds from one party to the other. The payment here will take place on the blockchain and initialize the transaction. And both parties will need the required starting balance of collateral staked on the trade. 

 

Benefits of Smart Contracts 

Besides the above-mentioned common benefits, there are other ways a smart contract can help traders. Let's take a closer look at the other benefits that they provide. 

 

•         Higher Safety 

Cryptography is one of the best ways to secure any type of data. This is good because smart contracts exist in blockchains that get their protection by cryptography. This allows no space for hackers and other threats to alter the conditions of a contract. 

 

•         Autonomous 

Smart contracts are codes programmed to run automatically on the network. There is no need for an outside party to execute or monitor the contracts. When no central authority has control over the contracts, it ensures that the codes will run exactly as intended. 

 

•         Mass backup 

Backing up the contract is not necessary with smart contracts as all the network nodes have a copy of it stored in them. This also eliminates any chances of a data loss from occurring. 

 

•         More efficient 

When contracts take place in the traditional paper-based way, it becomes a very time-consuming affair. Writing stuff down, checking if they meet the conditions, and storing it all take valuable time and effort. Smart contracts are a great way to bypass all of this. The automated process of these types of contracts takes all the necessary actions needed to complete the transaction by themselves. 

 

•         Less expensive 

Smart contracts eliminate the need for a middleman when completing the contract. This makes it the better option for the wallet of both parties involved. The money that would go towards lawyers, paper, and other expenses will remain in the hands of the traders. 

•         Accurate 

With smart contracts, there is no room for errors. If the required set of codes is accurate, they will work perfectly every time. This guarantees that there will be no misinterpretations or edited clauses when it comes to the conditions of the contract. 

 

Use cases of Smart contracts 

Smart contracts have the capacity to be flexible and adapt to any situation that can use a set of conditions.   

Some use cases of smart contracts are,

•         To provide digital identities 

•         In aspects of trade finance like payments, swaps, liability management, etc... 

•         To improve financial data recording 

•         To automate and manage the supply chain leading to less loss, fraud, and wastage 

•         For much more accurate financial services 

•         To improve the transparency and efficiency of governments 

•         To automate claims and resolve disputes in the insurance field 

•         To automate the mortgage approval process for a faster and more efficient solution. 

 

Conclusion 

As the most decentralized, secure, and robust smart contracts available, Ethereum smart contracts are efficient and have proven their use. The implementation rates of these contracts have seen fast-growing as more people become aware of them. 

Finally, it is safe to say that Ethereum smart contracts will play a large role in both the crypto and financial world in the future.