What are Smart Contracts? A Beginners Guide

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• Published: April 29th, 2020
• Updated: September 2nd, 2020

Smart contracts can revolutionize the way we conduct business.

Purchasing products or services requires a degree of trust. Especially when you’ve never done business with a person before.

Will the seller deliver the goods? Will the buyer send the money? Should the payment or the goods be sent first?

Traditionally this is resolved using an intermediary. A neutral party would act as the middleman to ensure neither buyer nor seller are defrauded during a transaction.

Intermediaries have worked well for decades. Lawyers, banks, real estate agents are common types of intermediaries that facilitate agreements.

What if intermediaries can be removed? 

What if a system existed where both the buyer and seller can effortlessly and confidently transact without the need to trust each other? All without intermediaries.

Introducing smart contracts. A type of contract that is programmed to exist on top of blockchains to facilitate transactions between two parties without the need for intermediaries. 

What are Smart Contracts?

Smart contracts were first proposed in 1997 by computer scientist Nick Szabo. He applied computer code to contractual agreements so that two parties can enter into an agreement without trusting each other. Essentially, a smart contract digitally facilitates, verifies, or enforces the negotiation or performance of a contract. 

How Smart Contracts work?

Smart contracts are created by programmers using code. The contracts often use a set of “if-then” statements to facilitate the terms of the agreement.

For example, if the seller receives funds from the buyer, then release the goods to the buyer. Although this is one type of example, the application of smart contracts extends far beyond simple transactions.

If the conditions of the agreement aren’t fulfilled, the contract would not be carried out. Despite being introduced over two decades ago, it wasn’t until the introduction of blockchain technology that they started to gain popularity.

Features of Smart Contracts

Customizable: Smart contracts can be customized to suit the needs of the two parties. No two transactions are the same. Thus, they can be adjusted before being deployed on the blockchain.

Transparent: Smart contracts are deployed on top of blockchains. Since blockchains can be audited by anyone, the terms of the agreement can be inspected by anyone.

Trustless: Both parties involved in the contract do not need to trust each other. Both parties can be reasonably assured that if they perform their part of the agreement, the contract will automatically execute. 

Autonomous: The execution of the contract is automatically executed once both parties perform their portion of the agreement.

Deterministic: Smart contracts can only execute what they have been programmed to do. Up until deployment, the contract can be customized. Once deployed, they become fixed and cannot be altered no matter the circumstances.

Problems with Smart Contracts

Despite posing as a revolutionary new technology, smart contracts are designed and programmed by humans. This makes them susceptible to bugs and vulnerabilities. Professional auditing company Hoshohave claimed that about 60% of smart contracts deployed have at least one security issue. Additionally, 1 in 4 have bugs that would prove critical. 

Designing and programming smart contracts is a very new field. As they gain popularity, more formal education will be developed to ensure smart contracts deployed on blockchains are secure and resilient to hackers. 

Practical Applications of Smart Contracts

>Real Estate 

Smart contracts would allow for a more efficient and accurate property title management system that could stretch beyond borders. This would reduce the need for lawyers and brokers to facilitate the purchase and sale of real estate. 

Medical 

Smart contracts can easily store patients’ medical history on the blockchain in a way that preserves the patients identity. If a patient were to move from hospital to hospital in different countries, the records can easily be transmitted without signing papers. The records would be shown to any physician that is granted access by the patient.

Elections 

Conducting an election process that involves manually counting ballots is a very inefficient and expensive system. The use of smart contracts would encourage greater voter participation and widen accessibility.  Voters can validate their identity to prevent multiple casted votes and have the counting process reduced to a few seconds. Overall, a potentially sizeable cost savings for the government. 
 

Key Takeaways:

    • A smart contract digitally facilitates, verifies, or enforces the negotiation or performance of a contract without the need of a intermediary
    • Smart contracts were first proposed in 1997 by computer scientist Nick Szabo
    • Smart contracts often use a set of “if-then” statements to facilitate the terms
    • Key features of a smart contracts are customizable, transparent, trustless, autonomous, and deterministic
    • About 60% of smart contracts deployed have at least one security issue. Additionally, 1 in 4 have bugs that would prove critical. 
    • Practical applications are wide ranging and can include but not limited to real estate, medical, and election industries

 

Austin Tuwiner Administrator
Austin is the owner of Bitpremier, and got involved in Bitcoin in 2012. After working as a cryptocurrency journalist and and at several blockchain startups, he decided to start Bitpremier and educate the world on Bitcoin.
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