What are Smart Contracts?
What are Smart Contracts?
A smart contract is a code running on top of a blockchain containing a set of rules under which the individuals to that smart contract agree to interact with each other. If and when the pre-defined rules are met, the agreement is automatically executed. The smart contract code facilitates, verifies, and executes the negotiation or performance of an agreement or transaction. It mainly helps carry out transactions and agreements between disparate, anonymous parties without needing a central authority or middlemen.
The most famous blockchain with smart contract abilities is the Ethereum (ETH) blockchain - there are thousands of smart contracts running on the Ethereum (ETH) blockchain. Apart from Ethereum (ETH), there are other blockchains like Ethereum Classic (ETC), Tron (TRX), NEO (NEO), EOS (EOS) etc. which are capable of running smart contracts on their respective blockchains.
Smart contracts are also known as blockchain contracts or digital contracts. It involves digital assets and two or more parties, where some or all of the parties deposit assets into the smart contract and the assets automatically get redistributed if and when the smart contract conditions are met depending on the initial conditions agreed and set by all the parties.
Example of a Smart Contract:
If John and Michalis don’t know and don’t trust each other, they usually require a trusted third party to serve as an intermediary to verify transactions and enforce them. With smart contracts & blockchains, you don’t need those trusted intermediaries anymore for clearing or settlement of your transactions. Let us think of a simple buying and selling of a car between these two parties.
If Michalis wants to purchase a car from John - On the Blockchain, once all involved authorities and companies are on a blockchain, a smart contract could be used to define all the rules of a valid car sale. If Michalis wanted to buy the car from John using a smart contract on the blockchain, the transaction would be verified by each node in the Blockchain Network to see if John is the owner of the car and if Michalis has enough money to pay John.
If the network agrees that both conditions are true, Michalis automatically gets the access code to the smart lock for the garage where John parks the car. The blockchain registers Michalis as the new owner of the car. John has 10,000 USD more on his account, and Michalis 10,000 USD less. No middlemen required!
Shortcomings of Smart Contracts:
As with any new technology, there are shortcomings with Smart Contracts too. With time, these will reduce or go away!
Smart contracts are not really smart - as in, they cannot react to each and every situation like us humans can. Smart contracts can only decide on the conditions that were coded during the initial coding of the contract. If parties to the agreement fail to think of a possible outcome, the smart contract cannot decide in those cases.
The legality of crypto is questionable in some countries and hence, it is not known if smart contracts are valid legal proofs in those countries.
The future of Smart Contracts:
The future looks very bright for smart contracts as more and more businesses and governments are adopting them. Also, a lot of research is being done to improve how the contracts work.
Futurists are already working on merging Artificial Intelligence (AI) with Smart Contracts - they believe this will make for a very good permissionless (no need of middlemen) future where almost everything is run on a decentralized and transparent platform for the greater good.