Today, we’re going to talk about What is Smart Contract and How does it work? every project, token have its own smart contract with appropriate terms in it.
A smart contract is a decentralized application that executes business logic in response to events. Smart contract execution can result in the exchange of money, delivery of services, unlocking of content protected by digital rights management or other types of data manipulation such as changing the name on a land title. Smart contracts can also be used to enforce privacy protection by, for example; facilitating the selective release of privacy-protected data to meet a specific request.
A smart contract is a computer program or a transaction protocol which is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreement.
The objectives of smart contracts are the reduction of need in trusted intermediators, arbitrations and enforcement costs, fraud losses, as well as the reduction of malicious and accidental exceptions.
Vending machines are mentioned as the oldest piece of technology equivalent to smart contract implementation. 2014’s white paper about the cryptocurrency Ethereum describes the Bitcoin protocol as a weak version of the smart contract concept as defined by computer scientist, lawyer and cryptographer Nick Szabo. Since Bitcoin, various cryptocurrencies support scripting languages which allow for more advanced smart contracts between untrusted parties.
Smart contracts should be differentiated from smart legal contracts. The letter refers to a traditional natural language legally-binding agreement which has certain terms expressed and implemented in machine-readable code.
How do smart contracts work?
Think smart contracts as digital “if-then” statements between two (or more) parties. If one group’s needs are met, then the agreement can be honored and the contract is considered as complete.
Let’s say a market asks a farmer for 100 ears of corn. The former will lock funds into a smart contract that can then be approved when the latter delivers. When the farmer delivers their obligation, the funds will immediately be released. However, the contract is canceled and funds are reversed to the client if the farmer misses their deadline.
Of course, the above is a small use case. Smart contracts can be programmed to work for the masses, replacing governmental mandates and retail systems, among other benefits. Moreover, smart contracts would potentially remove the need for bringing certain disagreements into court, saving parties both time and money.
In more technical terms, the idea of a smart contract can be broken down into a few steps. First, a smart contract needs an agreement between two or more parties. Once established than the two can agree on conditions in which the smart contract will be considered complete. The decision would be written into the smart contract, which is then encrypted and stored in the blockchain network.
This security is largely due to the underlying smart contract code. On Ethereum, for instance, contracts are written in its Solidity programming language, which is Turing complete. This means that the rules and limitations of smart contracts are built into the network’s code and no bad actor can manipulate such rules. Ideally, these limitations would mitigate scams or hidden contract alterations. The crypto smart contracts can only fall into place if all participants agree and sign on the matter. Then, it’s set for life.
In more technical terms, the idea of a smart contract can be broken down into a few steps. First, a smart contract needs an agreement between two or more parties. Once established, the two can agree on conditions in which the smart contract will be considered complete. The decision would be written into the smart contract, which is then encrypted and stored in the blockchain network.
Once the contract is complete, the transaction is recorded on the blockchain just as any other would. Then, all nodes will update their copy of the blockchain with this transaction, updating the new “state” of the network.
Now, you may be wondering if Bitcoin and other networks can utilize smart contracts. To a point, yes. Every Bitcoin transaction is technically a simplified version of a smart contract, and layer-two solutions such as the lightning network have been developed to expand the network’s functionality. That said, Ethereum’s use of smart contracts is a special case.
