Smart Contracts Explained for Beginners

Updated: Oct 21

Smart contracts have become a popular notion in the context of blockchain and cryptocurrencies.

However, the concept has been around for a while, as it was first introduced in 1994 by Nick Szabo, an American cryptographer. Smart Contracts were initially defined as a tool that formalizes and secures computer networks by combining user interfaces with protocols. Their potential application in various fields with contractual agreements was discussed such as in payment processing and credit systems.

Smart Contracts Explained

In general, smart contracts refer to a piece of computer software that is designed as an automated self-enforcing contract. This means that it can trigger specific actions when certain predetermined conditions are met. In other words, smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being written into lines of code directly.

So for example, one can use a smart contract as a digital agreement to intermediate the exchange of cryptocurrencies and other digital assets between the involved parties. When the contract terms have been agreed, the smart contract will verify their fulfilment and the digital assets will be distributed accordingly. Therefore, smart contracts involve lines of code that are set to execute a specific function when the set conditions are met.

Usually, the code might involve a function of “if … then …” statements that will trigger preset and predictable actions. So in a real-life application, “if a payment is received, the order will be executed”, making processes more efficient while simultaneously reducing the risk of human error.

Blockchain Applications & Trust

Due to their properties, smart contracts enable trusted transactions and agreements to be carried out between anonymous, disparate parties, without the requirement of a central authority, legal institution or external enforcement agency. Additionally, smart contracts allow transactions to be traceable, transparent, and irreversible.

With Smart Contract, parties can commit to an agreement without having to know or trust each other.

As such, smart contracts have a significant role in cryptocurrencies and blockchain technology, as they allow the creation of trustless protocols. The parties can commit to an agreement through blockchain without having to trust or know each other. This is because they trust that the smart contract will not be executed unless the conditions are fulfilled. Furthermore, smart contracts are widely adopted in blockchain networks as they remove the need for intermediaries, simultaneously reducing operating costs.

While Bitcoin’s protocol has long supported smart contracts, they became popular with Ethereum’s creator, Vitalik Buterin. Concluding, as each blockchain has its own properties, smart contracts applications on cryptocurrencies may vary in their implementation according to the cryptocurrency’s protocol.

Future Outlook

Smart contracts have revolutionized the blockchain community and will increasingly be applied in various industries such as FinTech. It is only a matter of time for these groundbreaking technologies to be adopted on a large scale.

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