Blockchain Basics: What Is A Smart Contract?
If you don’t know what a smart contract is, you are not alone. A vital ingredient to help steer the blockchain revolution, smart contracts, along with much else in blockchain technology, aren’t widely understood by everyone. And, really, why should you know or even care about a smart contract? Yes, at the present moment, the technology is complicated. But aside from satisfying sheer curiosity, you should know what a smart contract is because smart contracts will change the facilitation of everyday transactions between individuals and businesses.
Nick Szabo, a well-known computer scientist and cryptographer first coined the term smart contract in the early 1990s, to describe a computer protocol that could digitally facilitate a contract between two parties without the need for a third party. However, smart contracts became popularized by blockchain technology as smart contracts allow for transactions of greater complexity to take place and be recorded on the blockchain or distributed ledger. Transactions that occur on the blockchain are immutable i.e., they cannot be tampered with, but can be viewed at any time.
Smart contracts and Blockchain
Smart contracts contain lines of code, or rules, stored persistently within the blockchain network that computers or nodes execute – if the smart contract is handling authentic data, the contract is executed and the ledger’s state is updated. Everyone on the blockchain network records and validates this transaction once it is completed.
One widely used analogy to help individuals better visualize smart contracts involves a vending machine. Most people on earth know how an ordinary vending machine works. You pick a snack option, put in some coins, press the snack’s corresponding number, and out comes your snack. The same thing happens with a smart contract – you interact with the smart contract to carry out a transaction that the smart contract was specifically coded to do. The smart contract contains pre-written code on the blockchain that can execute a number of different transactions whether it be to sell or buy something, to vote, or to simply update a ledger with new information about something on the supply chain. The agreement is automatically executed on a completely transparent blockchain.
Smart contracts can be used on both public blockchains as well as enterprise, or private, blockchains. Smart contracts on public blockchains will allow individuals to carry out complex transactions with anyone else, unrestricted, whereas smart contracts on enterprise blockchains carry less independence. However, both forms are incredible for different reasons. Smart contracts on the public blockchain allow for more freedom and less reliance on centralized figures, however when used on the enterprise blockchain, smart contracts will allow transactions – such as payments, tracking of items, etc. – to move with incredible speed.
With the use of smart contracts, transactions such as the purchase of a car or a house will cost a fraction of what they currently do given the amount of individuals involved in closing both types of deals. For example, a smart contract will contain all relevant information on a car or a house – there is no need for lawyer or notaries, and long waiting times. In the future, if countries do move towards voting on the blockchain, smart contracts will be paramount, as they will provide greater transparency and can be easily audited in case of potential issues.
The possibilities are endless with smart contracts. They will usher in a totally new way of doing business. Interested in learning more about how you can implement blockchain technology solutions to optimize your business? Blockchain Collective has your back – from development to marketing to project management, we do it all. Visit us at blockchaincollective.co to learn more.