Smart Contracts for Dummies
What are smart contracts?
To put it simply, they are contracts that are executed automatically without the help of a third party. You can think of it as actually a mini computer program stored inside the blockchain.
Smart contracts use “if this, then that” logic and work much like a digital vending machine. If you agree to put money in the machine and make a selection, then the snack you chose will be distributed to you automatically. This transaction is an automated agreement between human and computer and does not require anyone else in order for the contract to be executed.
Everyday uses of automated “If this, then that” contracts.
Computer Scientist Nick Szabo first coined the term in 1994 when he described smart contracts as “a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions, minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs.
An easy example of how smart contracts can be used right now in real world situations is for improved crowdfunding solutions. Currently, companies like “Go-Fund-Me” and “Kickstarter” act as third party intermediaries to make sure the money being raised by their members actually gets to them in a safe way. For this service, they take a percentage of the money raised. A smart contract solution could be as simple as an agreement that says that if enough money is sent to a certain address before a certain date, then the funds will be released to the address that is asking for the crowdfunding. There could be any number of conditions included in this contract, all following the “if this, then that” logic.
So why should you trust a smart contract?
The main reason is because the contract is stored on the blockchain, and that fact guarantees it two special properties that will keep you and everyone else involved safe and treated fairly. Blockchains are immutable and distributed. The benefit of smart contracts being immutable is that that once it is written, it cannot be changed, it is essentially “tamper proof”. The benefit of smart contracts being distributed is that the output has to be validated by everyone on the network. No one person can force the release of funds, or the rest of the network would mark it as invalid.
Right now the most widely accepted smart contract blockchain is Ethereum. Ethereum was created specifically to support smart contracts. One of the most common usage of a smart contracts are decentralized exchanges (DEX). Users can create simple sale contracts that says if someone pays me X, they will be sent Y. These trades can be executed for an extremely low cost because no third party has to verify the transaction. Bitcoin also has some smart contract application but it is much more limiting.
Check out one of the first DEXs, Etherdelta
With smart contract technology we might one day live in a world when you pay for the product you ordered only AFTER it has it has a delivery confirmation. That same world will leave you with a lot more money in your pocket as the need for all third parties facilitators will drop drastically and so will the cost of doing any type of business. Smart contracts have many real world applications that can start being used right away in a number of different industries from banking to real estate and even postal!