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What is a Smart Contract in Crypto? All you need to Know!

Intelligent contract or autonomous contract are terms used to refer to a computer program or code that may be executed without the involvement of a third party with whom the parties have established a relationship of mutual confidence. As applied to blockchain, it is a program that automatically runs on a distributed network when certain conditions are met on a shared ledger, such as when a transaction is completed.

Smart contracts were first proposed by Nick Szabo in 1994, but it wasn’t until 2009 and the Bitcoin cryptocurrency that they were actually implemented into a usable system. These autonomous contracts are currently frequently used on the customised Ethereum platform, which was created specifically for this purpose and introduced in 2015.

What is a Smart Contract?

Smart contracts are computer programmes that run without the intervention of a trusted third party, usually on a blockchain such as Ethereum, and are used to transfer money between two parties. Each contract is made up of clauses, which are the criteria that must be met in order for a particular provision of the contract to be enforced in full. These terms and conditions are defined in advance by the contract’s developer and are recorded in an immutable manner on the blockchain.

Afterwards, the contract can be automatically triggered if particular circumstances are met somewhere along the supply chain. In contrast to a regular contract, there is no third party involved in the execution of the contract; everything is automated. A smart contract on the Ethereum blockchain, which was designed by Vitalik Buterin, is recognised by a public address, such as 0x5C69bEe701ef814a2B6a3EDD4B1652CB9cc5aA6f.

This address, in addition to managing ether transactions, contains code and data that are required for the effective operation of the programme. In contrast to a standard account, which requires a person to sign each transaction, a contract will react to the various interactions on its own, without the need for a person to intervene.

Example use Cases of a Smart Contract!

For example, a smart contract may be used to implement a lottery: a person deploys the contract at a specific address, and then anyone who wants to participate can buy a ticket by interacting with the contract. There are two clauses that can be implemented:

  • If the account balance reaches a specified amount on a specific date, the excess value is distributed to a randomly selected participant.
  • Otherwise, participants are reimbursed.

In fact, this is only one example of how autonomous contracts can be used, and the possibilities are much broader: representation and transfer of assets (tokens, deeds of property, and so on), games of all kinds, decentralised exchange services, loans, decentralised autonomous organisations, and so on.

Remember that smart contracts serve as the foundation for what are known as decentralised applications, or DApps. This is important to remember!

What Exactly are Smart Contracts used For?

Stand-alone contracts can be used for a variety of purposes, albeit they have not yet been fully utilised to their full potential. The current applications are numerous and diversified, but they will almost always be more closely associated with the financial area. A few examples of smart contract applications are provided below.

  • Accounts with multiple signatures: These accounts allow you to set up joint accounts that require several signatures in order to move funds.
  • The fiduciary deposit (also known as an escrow payment), which allows for the sequestration of monies while a good is being shipped later than expected. LocalCryptos, a peer-to-peer buying and selling platform, is an example of a sort of contract that is being implemented today.
  • Payment channels, which allow two users to make micropayments to each other, are becoming increasingly popular. The Lightning Network is built on top of these communication routes.
  • Fundraising is mostly accomplished through the pre-sale of a digital token that will have future utility. In the cryptocurrency world, we refer to initial coin offerings (ICO), initial exchange offerings (IEO), and security token offerings (STO), depending on the context and the nature of the token being offered.
  • Decentralized crypto-asset exchanges are becoming increasingly popular. This can include cryptocurrencies on different chains (through atomic swaps) or cryptos on the same chain (via cross-chain transactions).

Some Un-Explored Application Scenarios!

There is also a plethora of other application scenarios that have yet to be thoroughly explored. Some examples include:

  • Processes like birth certificates, property transfers, and other similar transactions can be automated through the notarial profession.
  • Simplification of the logistics chain (also known as the supply chain) which is the process through which a corporation orders the number of parts required for the production of a particular product in response to orders from customers.

All of the above instances imply the existence of “oracles,” which would make certain that real-world data is fed into the blockchain as it is collected. This raises the question of dependability: can we put our faith in an oracle for the purposes of its decentralised implementation? Oracle systems are now in use, however they need to be further developed.

What are the Risks?

Smart contracts, like anything else in computing, are vulnerable to hacking, which is the primary danger. The fact that the code has been made public on the channel makes it easy for a hacker to detect and exploit any bugs in the programming. This has already happened on Ethereum numerous times, and for exceptionally large sums of money: the most well-known example is the TheDAO contract hack on June 17, 2016, which allowed someone to grab 3.06 million ethers, which was worth more than $150 million at the time, from the contract’s owner.

Ultimately, this case resulted in a divide between the blockchains of Ethereum and Ethereum Classic (ETC): Ethereum (ETH) opted to annul the transfer in order to reimburse TheDAO investors, while Ethereum Classic chose to adhere to the principle of immutability. Because it is difficult (in principle) to amend or terminate a contract if we have not programmed for it, it is vital to test everything before starting with the network deployment.

There are several measures you may take to reduce your risk of being hacked, including:

  • It is important to employ standards that have been verified and tested by the community, such as the ERC-20 standard, which is frequently used to create new tokens on the Ethereum blockchain.
  • The usage of audits with specialized businesses should be thought about.