What are Smart Contracts?

Blockchain Basics

What are Smart Contracts?

A smart contract is a digital contract that helps you exchange anything of value without the service of a middleman. Smart contracts run on blockchains, that’s why a smart contract is also decentralized, traceable and irreversible. They are also called self-executing contracts, because they run without middlemen. After signing a smart contract, a network of nodes supervises the contract and checks whether the terms of the contract have been reached. When the terms have been reached, the contract gets settled without a third party. Smart contracts are digitalized contracts written in a programming language. There are dozens of cryptocurrencies that support smart contracts and they all implement different programming languages to write smart contracts with. Ethereum¬†was one of the first cryptocurrencies to support smart contract functionality.

Within a blockchain a smart contract is like an account with a public address. However, nobody owns the private key to the account. When a smart contract is created, nobody can access it or change it. Before a smart contract is created, terms of agreements are being made for the contract and when it expires.

 

How can smart contracts be used?

Smart contracts have many use cases. Businesses, governments but also normal users can benefit from using smart contracts. Repetitive payments like mortgage payments, cell phone bills, cable bills or gym memberships are very widespread. Normally you set up a permanent contract with your bank to pay those bills monthly or yearly. However, what if you don’t have to use your bank to do those payments. What if you just set up a smart contract with your landlord, your mobile carrier or your gym? The smart contract would automatically transact the money to your contract party at a certain date. This makes the usage of banks, lawyers or notaries unnecessary.

Governments can also profit from using smart contracts. Voting is a huge issue in most countries because less and less people vote. A huge factor causing this problem is the fact that you have to vote at a local authority or with the mail from home. Going to a local authority to vote is slow because you have to show your identity and most of the time you have to wait for others to finish voting before you can. With smart contracts you can vote over the internet easily if you have a valid ID. There are currently many companies and developers working on digital identity smart contracts that could be used to identify yourself on a blockchain to make voting with smart contracts possible.

These are just two examples, however the use cases for smart contracts are endless. Businesses and enterprises are just getting behind the new technology. In the future we could see massive changes in the way we have contracts with others by implementing smart contracts.

 

What are Initial Coin Offerings (ICO’s)?

One very convenient use case for smart contracts are Initial Coin Offerings or ICO’s. An ICO is a fundraising tool where investors fund the development of new cryptocurrencies with already existing cryptocurrencies like Bitcoin or Ethereum. For the funding, the investors receive tokens of the cryptocurrency that is being developed. The return of the funding in form of a new token happens automatically after a certain time which the developers include in the smart contract. Most ICO’s happen over the Ethereum blockchain and the tokens that investors receive are ERC-20 tokens.

Investors hope for big returns when the cryptocurrencies go public. The developers normally publish a whitepaper which investors can read. The whitepaper contains the vision and the idea behind the cryptocurrency. If investors are interested in the idea, they can invest with Bitcoin or other cryptocurrencies. Many projects like EOS or TRON were once funded over an ICO.

 

Advantages of smart contracts

There are many advantages of using smart contracts.

  • Lower costs because no intermediaries
  • Less contract execution time because contracts are executed automatically
  • Smart contracts are transparent and irreversible
  • Data that is stored in a smart contract on a blockchain is secure
  • Smart contracts can’t disappear because they are saved on a decentralized system