The cryptocurrency market is actively developing today, so the interest of citizens and investors is only growing. Many have already invested in cryptocurrencies, and made a profit, while others lost their hard-earned money due to market volatility.
Despite this, cohorts of recruits are ready to become crypto enthusiasts. In order not to make mistakes from the very beginning, it is important to study the background of the technologies used.
Therefore, today we will talk about what smart contracts are in the blockchain. Let’s consider the advantages and disadvantages of the technology, the principles of its operation and the scope of application.
Sit back, it will be interesting.
A smart contract is a computer program that guarantees the fulfillment of an agreement concluded between two users. That is, the algorithm starts working with a given sequence when certain conditions are met.
An ordinary contract, presented in paper or electronic form, has a lot in common with a smart contract. For example, a voluntary agreement between the parties, a single object of the contract and unity of purpose.
However, there are also differences in the legal consequences of the concluded contract, the specifics of compliance and the way of writing.
For the first time, the term “smart contract” was proposed by Nick Szabo, who presented a new technology as a computer protocol with specified algorithms for automated fulfillment of the terms of the agreement.
However, to implement this idea, an appropriate technology was needed, which appeared with the arrival of cryptocurrencies.
It is important to understand that the capabilities of smart contracts vary depending on the blockchain used. Let’s look at two of the most popular concepts on today.
Bitcoin Smart Contracts
Initially, the Bitcoin blockchain did not provide for the use of smart contracts, but it is still possible to implement certain logical operations on the block sequences that do not have Turing completeness.
Turing completeness is a smart contract parameter in the blockchain that shows which computational functions can be implemented in the blocks of the chain.
Let’s look at some examples of smart contracts on the Bitcoin blockchain:
Since blockchain users needed more complex functions implemented through smart contracts, there was a need to create a new block chain.
Ethereum Smart Contracts
Vitalik Butiren took into account the disadvantages of Bitcoin when creating a fundamentally new Ethereum blockchain. The platform allows you to create Turing-complete smart contracts thanks to the Solidity programming language. Thanks to him, the Ethereum network perceives each transaction as part of the systеm, and not as a separate mechanism implemented in Bitcoin.
The Ethereum blockchain also has the ability to create token generators using unified protocols. One of the most common is ERC-20. Standardization has made it possible to optimize and simplify the interaction between cryptocurrency exchanges, crypto projects and users of the systеm.
Smart contracts and cryptocurrency are not always one. There are already projects in the network that have abandoned the use of this functionality.
Let’s talk in more detail about the principles of smart contracts.
Smart contracts are an analogue of an application with recorded agreements between the parties, which is carried out in compliance with the obligations assumed by the users.
The structure of any smart contract consists of the following elements:
Smart contract technology can be schematically represented in the form of the following sequence of actions:
Depending on the terms of the transaction, there may be intermediate stages according to the type of confirmation by a third party of the completion of the transfer.
In order for a smart contract to work, you need to meet four conditions:
Smart contracts, on the one hand, are a simple program code, like a computer game or a calculator, written in Python. The other is a fundamental element of decentralized cryptocurrency projects. In centralized payment systems such as MasterCard or VISA, there is an administration that controls transfers between individuals or legal entities. In their hands there are tools for blocking unwanted transactions, manipulations by market participants.
In decentralized systems, no one has such tools and powers. Therefore, smart contracts ensure the security and anonymity of the exchange of digitized assets.
Crypto enthusiasts, programmers and old-timers of the cryptocurrency market note the following features of smart contracts:
Let’s talk in more detail about the strengths and weaknesses of smart contracts.
In addition to the strengths, smart contracts have several weaknesses:
If everything is clear with this so far, let’s talk about the practical use of the protocol in real life.
Now smart contracts are being actively implemented in:
Smart contracts have not yet penetrated into a person’s daily life due to legal restrictions and the general distrust of people in the new technology. However, the process cannot be stopped, and the cryptocurrency market will continue to integrate into the spheres of life familiar to humans. Smart contracts will become the basis for the exchange of information, funds, goods and services.