Blockchain smart contract: what is it in simple words

Blockchain smart contract: what is it in simple words

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.

Smart contracts and cryptocurrencies

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.

For reference!

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:

  1. Escrow— in order to use the funds, you need a written assurance from a third party.
  2. Multisite— the number and addresses of the participants of the transaction are determined automatically. To conduct a transaction, signatures of all participants-the “owners” of the contract are needed.
  3. Testament— if the wallet is deactivated, then the heirs can use the funds in the vault. More precisely, only assets that are pledged after a certain block with the desired creation date.
  4. Safe deposit box — funds are automatically blocked on the account until a certain period.

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.

How it works and why they are needed

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:

  1. The platform on which the application is written.
  2. An item is a digitized asset that is sold or bought by users. It can be a service, information or a token.
  3. The terms of the agreement that need to be satisfied for the transaction.
  4. The parties to the agreement with unique digital signatures.
  5. Oracles are independent sources of information from the outside (if necessary).

Smart contract technology can be schematically represented in the form of the following sequence of actions:

  1. One of the users creates a transaction.
  2. Information about this is recorded in the network, which consists of nodes (blockchain nodes).
  3. Nodes, due to the built-in consensus algorithms, confirm the identity of the creator of the transaction and the possibility of its execution.
  4. Information about the transfer gets into the new block of the chain along with others.
  5. A new block is opened by miners and added to the endless blockchain chain
  6. The transaction is being completed.

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:

  1. If a blockchain is needed, on the basis of which an agreement between the parties is implemented, then there is a need for a distributed data registry and infrastructure.
  2. We need cryptocurrency as a unit of account and “fuel” for conducting smart contracts between users.
  3. We need to expand the number of users who use smart contracts to popularize this type of interaction.
  4. It is impossible to do without legal regulation of the process of exchanging funds, services and goods in the blockchain in order to avoid administrative or criminal consequences.

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.

Features of smart contracts

Crypto enthusiasts, programmers and old-timers of the cryptocurrency market note the following features of smart contracts:

  • distribution— information about the transaction is evenly distributed across all nodes of the blockchain;
  • determinism is always a predictable result due to clear algorithms of algorithms’ actions;
  • autonomy— initiated conditions are satisfied automatically without the consent of intermediaries;
  • immutability is a common feature with the blockchain, that is, after creating conditions and transactions, they cannot be changed.;
  • customizability— at the stage of writing the code, any computable algorithm can be implemented;
  • trustworthiness— all data is automatically recorded and the user is trusted with the reliability and honesty of the protocol;
  • transparency — as a rule, the source code of smart contracts is open, but there are exceptions.

Let’s talk in more detail about the strengths and weaknesses of smart contracts.

Advantages and disadvantages

Advantages:

  1. Absence of intermediaries.
  2. All information is securely stored in the block chain in encrypted form.
  3. High accuracy of transaction execution, the negative influence of the human factor is practically excluded.
  4. Almost instant execution of transactions due to automation.
  5. In addition to the fee for “gas”, there are no expenses for intermediary services during transactions.
  6. All conditions and results are known in advance.
  7. You cannot make changes to an already created contract.

In addition to the strengths, smart contracts have several weaknesses:

  1. There is still no full-fledged public confidence in the new technology.
  2. Being outside the legislative field hinders the implementation of smart contracts in various spheres of human life
  3. There is always a risk of error in the written code.
  4. The complexity of implementing smart contracts in different areas of life
  5. Smart contracts use cryptocurrencies as a means of payment, which is not recognized by the governments of most countries of the world
  6. It is necessary to have reliable oracles (sources of external information)
  7. Immutability, preventing the correction of mistakes, lack of flexibility in the terms of the agreement between the parties

If everything is clear with this so far, let’s talk about the practical use of the protocol in real life.

Using smart contracts in various fields

Now smart contracts are being actively implemented in:

  1. Clearing is a non-cash settlement between the parties for services or goods provided, securities.
  2. Supply chains — creation of transparent chains for the creation of goods from raw materials to the finished product.
  3. Healthcare — creation of a unified and secure registry of medical records.
  4. Media industry – establishment of a transparent royalty systеm (fees for the use of intellectual property).

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.

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26.11.2022, 19:35