What are smart contracts?
Smart contracts are the opposite points of traditional contracts. What is a contract? It is an agreement between two or more two parties to fulfill a commitment in case certain conditions are met. A traditional contract usually has two features: 1. It is based on trust and 2. It relies on third parties. Whatever conditions you set in a contract, you finally trust the other party to fulfill his/her commitments. Besides, you usually refer to a third-party entity to set this contract.
What if a completely digital contract existed that necessitated both parties to fulfill their commitments? This way, you didn’t need to trust the other party, and you didn’t need to refer to a third party either. This is exactly what smart contracts are.
Imagine you want to buy a house. Without smart contracts, you need to go to real estate and write a contract. This contract includes terms like parties, commitments, time, and price. A smart contract can include all these terms but in a digital form. Using a smart contract, you can determine the buyer, the seller, and the price. As soon as the buyer transfers the amount to the seller, the ownership of the house is transferred to him/her in an irreversible way.
This is of course the simplest definition of a smart contract. It doesn’t cover the technical details of these contracts. If you are curious to know how smart contracts exactly work and how they realize these features, stay with us in the next part.
How do smart contracts work?
In the world of smart contracts, everything is digital, and everything is done by tokens and addresses. Each contract has an address that gets activated when a transaction is made to it. Another feature of smart contracts is that all properties are tokenized. Remember the example of buying the house again. The corresponding contract has a unique address to which the buyer has to send the amount. The amount is in the form of tokens and it is predetermined. The ownership of the house is also represented in the form of a token. The contract has been coded in a way that as soon as it receives the predetermined amount from the predetermined address, it transfers the ownership token to it.
This is true about all decentralized applications that use smart contracts. Imagine a smart-contract-based social media application. Every like or comment in this application is actually a transaction to its contract.
what are decentralized applications and how do they differ from smart contracts?
You may have heard the term “decentralized application” and after reading this article, you may wonder what the difference between a decentralized application and a smart contract is. A decentralized application is simply an application that uses a smart contract as its backend. The front end of these applications is the same as all centralized applications you know. Therefore, the end user will not figure out if he/she is using a centralized application or a decentralized one. The difference lies in the backend. While centralized applications use limited centralized servers, decentralized applications run on decentralized smart contracts.
Decentralized applications or Dapps actually bring smart contracts into use. Without decentralized applications, smart contracts are only available at the theoretical level.
Some real-world use cases of smart contracts
Smart contracts have numerous use cases today, so referring to all of them is beyond the scope of this article. By the way, we have selected some more common more popular use cases and we will briefly go through them in the following sections.
decentralized exchanges
Decentralized exchanges or DEXes are among the earliest best-known use cases of smart contracts. As their name suggests, decentralized exchanges are the decentralized versions of cryptocurrency exchanges. They don’t have a single manager or a managing team. Instead, their liquidity is provided by the users.
decentralized autonomous organizations
Decentralized autonomous organizations or DAOs are virtual organizations run by users. Exactly like traditional organizations, DAOs have a goal to pursue, but the difference is that all DAO members participate in the governance process. All DAOs have a governance token whose holders are considered the participants of that DAO.
play-to-earn games
Play-to-earn games are relatively newer but as popular as the previous ones. They are games that reward their users not with in-game assets, but with tokens having real value. The ideology behind play-to-earn games is that users are contributing to that game’s success, so they must have a share of the earned profit.
decentralized video streaming platforms
Decentralized video streaming platforms remove third parties and directly connect video makers to end users. This has several advantages for both video makers and users. Users can directly reward the content they like, and get rewarded for watching some special form of content like advertisements.
Conclusion
Smart contracts were the foundation of all decentralized products we had afterward. They paved the way for the giant world of Defi we have today. Nowadays, all newly-developed cryptocurrency platforms support smart contracts. They were the transition gate from first-generation blockchains to second-generation and third-generation blockchains. So, as it’s obvious, we owe smart contracts a lot.
What is a smart contract?
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.
How do smart contracts work?
Smart contracts work by executing automatically and transparently once certain predetermined conditions are met, without the need for a middleman or third party.
What is the difference between a traditional contract and a smart contract?
A traditional contract is a paper or digital agreement that requires a third party to enforce its terms, while a smart contract is a self-executing agreement that automatically executes its terms and conditions.
What are some benefits of using smart contracts?
The benefits of smart contracts include increased efficiency, lower transaction costs, faster transactions, increased security, and greater transparency.
What are some potential use cases for smart contracts?
Potential use cases for smart contracts include real estate transactions, supply chain management, voting systems, insurance claims processing, and digital identity management.
