What Is a SMART Contract?

What Is a SMART Contract

Smart contracts are revolutionizing the speed and efficiency of digital transactions.

In August 2021, the cryptocurrency market hit the US$2 trillion mark. The NFT market has been doing equally well, with sales volume surging to US$2.5 billion in the first quarter of 2021. The common thread between these figures is the use of blockchain technology and smart contracts. 

Each crypto or NFT transaction on the blockchain needs a smart contract to be carried out. A smart contract is a program on the blockchain that contains self-executing code. This code contains terms of agreements between a buyer and a seller. This self-executing nature of a smart contract allows transactions to take place between parties that may not know each other without the need for a central authority.

With smart contracts underpinning the execution of transactions on the blockchain, it is imperative that you know how they work before diving into crypto or NFT investments. Let’s take a closer look at how a smart contract works and the pros and cons of using it.

How does a smart contract work?

A smart contract follows simple “if/when” statements which are integrated into the code of the blockchain. To better understand this, let’s use an example. Let’s say Mr. A wants to buy an NFT that Mr. B is selling.The terms of the smart contract would be something like “if Mr. A pays Mr. B 20 Ether then the ownership of Mr. B’s NFT will be transferred to Mr. A”. 

The actions performed by a smart contract can be anything from releasing funds, registering a vehicle to sending notifications or issuing tickets. Once the transaction is done, it is updated on the blockchain and cannot be reversed. 

Pros of a smart contract

Smart contracts are self-executing, eliminating the need for third parties to process transactions. So, the parties involved in the transaction no longer have to pay commissions or wait for paperwork to be finished. Since there is little or no bureaucracy involved, the transactions take place at a much faster pace.

Smart contracts are also highly secure because of the decentralized structure of a blockchain. Blockchains are decentralized records that are stored on individual computers of all the users in the network. So, to hack the network and change the US$ amount of a transaction would require more than 50% of all computing power on the blockchain. 

Cons of a smart contract

Even though smart contracts are automated, the code is still susceptible to human errors. For instance, the error in DAO’s smart contract code cost the company and its users US$60 million when DAO was hacked in 2016. These errors can often be time- and energy-consuming to fix.

To make a fail-proof smart contract, coders need to be experienced and well-versed in legal knowledge so that the terms of the contract can be properly set. For this, they would have to rely on lawyers. This eliminates the advantage that a smart contract has of being free from third-party involvement. 

Smart contracts are increasingly being used for more and more purposes. The global smart contract market is expected to reach US$300 million by the end of 2023. To understand where smart contracts and blockchains can be used, you can check out our articles “Blockchain: A Weapon Against Fraud In The Bunker Industry” and “Is Blockchain The Future Of Real Estate?” 

Header image courtesy of Freepik

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