In a previous article we took a look at blockchain protocols, the building blocks of cryptocurrencies and blockchain. One of the fundamental concepts in blockchain protocols is smart contracts which are in essence, transaction protocols that are executed on a blockchain. In this article, we are going to take a look at what exactly smart contracts are, why they are used and some of the most popular smart contracts out there right now.
Smart contracts are blocks of code that are only executed once certain predetermined conditions are met on a blockchain. When a transaction takes place between involved parties, it automates the agreement process by notifying the sellers and buyers of the outcome. In this way, intermediary parties, such as legal authority or enformencement are not required to get involved since it allows for trusted and transparent transactions, thus saving both time and money. A smart contract holds the terms of agreement between a buyer and seller in code, and is stored across all nodes in a blockchain making the execution of an agreement or transaction permanent and traceable.
It consists of a series of if/then and when statements in code stored on the blockchain. After predetermined conditions have been met, the nodes in the blockchain will execute the contract and an action will take place such as the transferral of a digital asset. The blockchain is then updated to indicate that a transaction has taken place, and this transaction is stored permanently allowing all involved parties to view the outcome of the transaction. The conditions that trigger it and terms of agreement are defined by its participants so that the transaction can take place in what they deem to be a satisfactory manner. The participants need to agree on how the transaction should look on the blockchain and the if/then and when statements in the contract that make the transaction possible. After a transaction has been initiated and the parameters defining the conditions have been met, it is then executed. If there are to be disputes, participants are also required to define how it will be handled. It can be built by developers, however, as they are becoming increasingly popular there are many online tools and web interfaces that can be used to create them.
Some of the benefits of this include improved efficiency of transactions since third party involvement is not required and it is self-executing. The second benefit is assured trust and transparency since transactions are stored across all nodes in the blockchain in a permanent way for all participants to view, because of this a participant can’t change the transaction. Blockchain transactions are also encrypted and are stored in a distributed ledger making it difficult for a hacker to access a specific transaction. It allows you to perform complex transactions between parties at a lower cost. A fee is required for a transaction to take place on a blockchain, the more complex a transaction the higher the fee would be to execute it. Without this the concept of NFTs and decentralised finance applications would not be possible.
There are many blockchains that offer platforms on which smart contracts can be built and used. Ethereum provides users with a secure and standardized way to implement it using their own coding language called Solidity. Ethereum is one of the most popular platforms to build smart contracts and can be used with almost any decentralised application. Cardano will also be introducing smart contracts into their platform in 2021. Hyperledger Fabric is another smart contract platform that can be used for organizations that are using sensitive data. With Hyperledger participant’s identities are known and they are authenticated before being able to use the blockchain.
It is evident that this is a fundamental concept in blockchain to ensure easy and secure agreements and transactions between involved parties. As they become increasingly popular, blockchain companies have started adding smart contracts to their offerings. With smart contracts, your organization’s blockchain projects can reach its full potential.