If you've ever had a go at an online slot machine, you are probably acquainted with how it operates – you place a bet and press a button. If the displayed images favor you, your winnings are paid out instantly.
Put simply, once set in motion, the slot machine acts autonomously, and rewards are dispensed accordingly. This is analogous to the operations of smart contracts.
This section delves into smart contracts, elucidating what they are, how they operate, and their applications.
Let's delve into the realm of smart contracts!
Deciphering Smart Contracts
Officially, Smart Contracts in the realm of cryptocurrencies represent a set of pre-established regulations that trigger various activities on the blockchain without relying on an intermediary. It can be likened to a software program or a blockchain application, with its own inherent logic in different scenarios. These contracts are devised by developers and deployed on blockchains to imbue a rationale into users' activities. In essence, they make blockchains operate intelligently, adhering to predefined conditions.
So, what are smart contracts in simple terms?
Essentially, they act as binding agreements for specific occurrences. For instance, if you make a pact with a friend to mow their lawn in return for assistance with your math homework, it qualifies as a contract.
The “smart” aspect in “smart contract” conveys a pivotal notion. In essence, it denotes that the contract gets executed automatically, free from human intervention, and becomes immutable once activated.
Consider the scenario of procuring a loan. You would finalize the specifics with your bank and sign a contract. After the details are settled, the loan amount is disbursed into your account by the bank.
However, in this conventional process, a human steps in – validating your details and disbursing the loan. Smart contracts eliminate the intermediary – your details are autonomously authenticated based on predefined criteria, and the funds are disbursed sans human involvement.
Primarily, this encapsulates one of the core functions of smart contracts – the ability to enable automated processes, circumventing the necessity for human intervention. It's akin to using a coffee machine – instead of boiling water in a kettle, adding coffee to a mug, and pouring hot water, you simply hit a button and wait – the process unfolds automatically! In essence, your coffee machine is now labeled “smart”, as it operates based on initially programmed logic without requiring external involvement. The same principle applies to Smart Contracts.
It's efficient, swift, and effective. However, imagine desiring tea instead of coffee halfway through the machine's brew. You could simply press a button and terminate the process.
Well, this exemplifies an antithetical core feature of smart contracts – once initiated, there's no turning back. Irrespective of circumstances, a smart contract follows through once set in motion.
Although this might sound intimidating, it heralds positive outcomes!
The stringent execution nature of smart contracts ensures users are not misled once the contract is in progress. Let's revisit the coffee machine analogy. Visualize craving a cup of coffee – you set the machine to brew your favorite latte and engage in other tasks as it commences. However, an individual passes by, notices your beverage preparation, and whimsically presses the “STOP” button, playing a prank on you.
You return to find the machine switched off, no coffee brewed – surely infuriating!
In this case, it's merely a trivial inconvenience. However, since smart contracts typically involve substantial monetary sums, the risks become far more substantial and noteworthy.
In essence, unscrupulous individuals could defraud investors by promising great returns and absconding with their funds. Smart contracts afford potential investors protection against this through…
Inspecting the intricacies behind them and offering assurances that once activated, the agreements won’t be modified.
How? Unlike the rationale of a coffee machine, smart contracts are public, allowing anyone to scrutinize and understand the precise logic at play, and how it unfolds after specific actions are taken. This undoubtedly brings about a sense of openness and clarity. In instances where blockchain activities involve numerous participants, the community will consistently review the smart contracts in place for those activities.
How Do Smart Contracts Operate?
Lets delve into the workings of smart contracts.
The majority of smart contracts are originated and circulated on the smart network, particularly the Ethereum network. This sets apart Ethereum-based blockchains from Bitcoins. Ethereum is a “smart” decentralized global network powered by crypto, resembling a multitude of interconnected computers. Interacting on this network, people can devise various applications, including smart contracts. The blockchain network of Bitcoins, on the other hand, can be described as ‘dumb' due to its absence of smart functionality, resulting in no support for smart contracts.
Specifically, on the Ethereum platform, smart contracts are fashioned using Solidity – a programming language tailored for developers operating within the Ethereum network. These developers receive the instructions for a smart contract, for instance, ‘if Sam pays me $10, I will send Sam the article', and then mold it employing Solidity. In essence, a smart contract can be likened to an “IF something happens, THEN do this” function.
Upon creation, a smart contract requires deployment on the network. Once accomplished, the contract becomes active, and the terms can be executed.
As mentioned, smart contracts function automatically. This implies that once they are deployed, developers need not make any further additions or modifications – if the terms are met, the contract will execute its intended function.
Moreover, it is important to note that smart contracts are immutable – rendering them unchangeable. This characteristic ensures their security and reliability, provided that the conditions under which they were deployed were scrutinized and found to be just.
This might leave you pondering – WHY are smart contracts unalterable? How is this guaranteed?
The credit goes to blockchain technology. Without delving deep into technicalities, suffice to say that to alter the terms of a smart contract after deployment, you would need to control at least 51% of the blockchain on which the contract is based – a nearly impossible feat.
For further understanding of blockchains, explore the dedicated section on the topic.
What Can Smart Contracts Be Utilized for?
So, we have already expounded on the nature of smart contracts and their operating mechanisms. Finally, let’s explore some examples of the applications of this technology.
Imagine you are a farmer seeking to insure your crops in the event of a drought. The insurance company employs a smart contract for your insurance, with terms such as:
“If the air temperature between months A and B is above 90 degrees Fahrenheit for at least C number of consecutive days, pay out the farmer X amount of money.”
Subsequently, the insurance company programs the smart contract to track reliable local weather news platforms. As a result, the entire process becomes automated – guaranteeing that in the event of a drought, you will automatically receive your insurance payout!
Crucially, the terms agreed upon can never be altered.
Here’s another scenario – you wish to secure a yearly bonus at work and are in negotiations with your boss. Your boss outlines the requirements, sets a deadline, and creates a smart contract with terms like:
“If A performs B, C, and D tasks until December 31st, 2022, A receives a bonus of X amount of money.”
In such an instance, you are assured of receiving the bonus should all requirements be met by the year-end. Once the smart contract is in place, there is no turning back! And your unpredictable boss won't change his stance just because of unfavorable weather conditions!
These examples underscore the potential of smart contract technology. The scope for integrating smart contracts into various fields is tremendous. In fact, smart contracts are steadily gaining traction in mainstream applications!
So, here we have covered all crucial aspects of smart contracts – their nature, functioning, and diverse applications. Don’t forget to check out our section dedicated to NFTs for more on various crypto topics.
