What are Smart Contracts?

A smart contract works like a normal contract. A normal contract is simply a bridge between the agreement of two or more parties which ensures that all the parties involved live up to their respective commitments. The only outstanding difference between a smart contract and a normal contract is that a smart contract is a set of codes on the blockchain network. 

In 1997, a Computer Scientist, Law Scholar and Cryptographer named Nick Szabo, first used the term “smart contracts”. His aim was to store contracts with distributed ledgers. This is why the smart contract is stored on the blockchain, an immutable distributed ledger. This way everyone can have a copy of the contract but cannot make any change to it. It also automatically shares qualities with the blockchain because they are stored on it. 

Smart contracts are programmed in a unique programming language called solidity. This programming language was specially created for the Ethereum blockchain which is why it operates effectively on Ethereum. Bitcoin also has the capability to support smart contracts but it is limited.

Let’s talk about the usefulness of smart contracts. How can this technology work for you? And, how does it even help cryptocurrency?

Guidelines or rules for negotiating the terms of a contract are stored on the smart contract. When the parties involved meet up to their commitments, the smart contract automatically verifies the contract and executes the agreed term.

Here’s a perfect scenario:

Jane has a product for sale and John wants to buy this product. But, there’s a little problem. Jane and John stay far away from each other and Jane would have to ship the product which isn’t a problem right? But, Jane and John do not trust each other. Jane is not sure that John would send payment after receiving the product in good condition and John is not sure that Jane would send the product in good condition. So, paying before delivery isn’t a smart option for him.

They need a system that would keep both parties honest.

In comes smart contracts. The smart contract is programmed to pay Jane after John has received his product in good condition. Jane does not receive payment until John confirms that the product has been delivered in good condition. The smart contract holds payment to ensure that Jane receives her money as soon as the product is delivered to John in good condition. Problem solved!

Here, the smart contract acts as an escrow that ensures that both parties live up to their commitment. It can also be used as a contract for the transfer of property and for other forms of agreement. The agreement cannot be adjusted or changed because it is stored on the blockchain and the blockchain is immutable. Also, both parties would have access to copies of the smart contract because of its decentralized nature.

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Quidax is a European based digital assets exchange that provides a simple platform for users to send, receive, buy and sell digital currencies. Our aim is to educate you about cryptocurrency. It should not be considered as financial advice. You should conduct your own research before deciding to store, buy or sell any cryptocurrency.