The more you learn about crypto and how it works, the more you encounter new concepts and notions that you need to understand before diving into this fascinating world. Today, we’re going to discuss smart contracts on a blockchain, what they are, how they work, and their benefits. Ready to learn-to-win?
What are smart contracts?
Just like any other type of contract, smart contracts establish the terms of an agreement between a buyer and a seller. The main difference is, with smart contracts, these terms of agreements are written within the lines of code existing on a blockchain. When preexisting conditions are met, these contracts are executed, making the transactions both trackable and irreversible. The beauty of smart contracts is that they eliminate the need for a central authority, like a bank, allowing for secure and decentralized transactions between two parties.
How they work
The concept of “smart contracts” first appeared in 1994, coined by American computer scientist Nick Szabo, who referred to them as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises." He defined smart contracts as computerized transaction protocols that execute the terms of an agreement.
Fast-forward to our current times; these contracts are executed through a blockchain network, the contract's code being replicated on all the computers of that specific network. The smart contract code represents various conditional statements used to describe the conditions of a possible future transaction. Imagine a series of “if/when…then” statements embedded in the blockchain. When those predetermined conditions are met, the computer automatically executes the actions written in the code.
What advantages do they bring to the table?
Smart contracts are used in crypto transactions due to their many benefits. They are fast, efficient, and accurate. As soon as the conditions are met, the contract executes automatically. There are no waiting times related to processing paperwork and fewer mistakes like in standard contracts.
All blockchain transactions are encrypted, making them hard to hack. They are secure and transparent since there is no third party involved. Also, no single record can be altered since each record is connected to the previous and the following ones on the blockchain. Last but not least, there are smaller fees to deal with since there are no third parties involved in the transactions.
Smart contracts are an essential part of the crypto world, as they allow developers to build all kinds of decentralized apps or tokens. They can have many applications, from financial tools to game experiences. These smart contract apps are referred to as “dapps” or decentralized applications and include DeFi tech ( decentralized finance). With their help, you can swap currencies faster and easier without paying high fees.
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