Smart Contracts Explained for Non-coders
No coding background? No problem! Explore the world of smart contracts in this easy-to-understand guide. Learn how they're reshaping industries, one block at a time!
Have you heard of smart contracts but feel lost in technical jargon? Don't worry, you're not alone! This article is for people just like you, curious about these digital powerhouses but overwhelmed by complex explanations. We'll break down smart contracts in a way that's easy to digest, explaining their purpose, importance, and potential to revolutionize industries. So, buckle up and get ready to embark on a journey into the heart of blockchain technology.
TL;DR:
- A smart contract is a computer code living on a blockchain, which automatically executes actions based on predefined conditions.
- Smart contracts help tremendously in enforcing agreements because their logic cannot be altered once it is placed on-chain.
- The first concept of smart contracts was introduced well before blockchain by computer scientist Nick Szabo back in the 1990s.
- Current applications of smart contracts range from decentralized finance (DeFi), through real estate to supply chain management and legal.
What is a smart contract?
Imagine having a machine that automatically makes decisions for you based on a set of rules you define – that's essentially what a smart contract does. In the simplest terms, a smart contract is a self-executing agreement with the terms of the contract encoded into a computer program. This program lives on a blockchain, an encrypted, decentralized digital ledger that records transactions across multiple computers so the record can't be altered retroactively.
But, let's break it down further. Unlike a traditional contract, a smart contract doesn't need a third party (like a lawyer or a bank) to enforce the terms. Instead, it automatically triggers the agreement's execution when predefined conditions are met.
For instance, if you're renting a house, the smart contract might automatically transfer the digital key to the renter and the payment to the owner once both parties have agreed on the terms. This automation removes the need for middlemen and the associated costs, leading to faster, cheaper, and more secure transactions.
Quick Historical Detour
The concept of smart contracts was first introduced way before blockchain in the early 1990s by computer scientist Nick Szabo. However, they became a reality with the advent of blockchain technology, particularly with Ethereum's launch in 2015. Today, smart contracts are integral to many blockchain platforms and decentralized applications,
What are smart contracts good for?
Smart contracts bring to life the main promise of blockchain - trustless, decentralized transactions. Their applications span across numerous industries, often streamlining processes and introducing novel approaches to traditional practices. They're dramatically transforming finance, powering Decentralized Finance (DeFi) platforms, allowing people to lend, borrow, trade, and earn interest on their assets without traditional banks.
Moreover, in the real estate sector, smart contracts can simplify property transactions that typically involve lengthy paperwork and various intermediaries. Through smart contracts, property ownership can be tokenized, and the tokens can be bought or sold, providing a transparent, frictionless way to trade real estate.
How do Smart Contracts Work?
Smart contracts are essentially defined conditions that determine what will happen after a specific action is performed. This logic is well known and is usually referred to as the “If, Then” condition.
By themselves, we can find If, Then conditions in almost all computer algorithms, but with smart contracts the key difference is that the action will be performed automatically with no means of stopping. Because the code of the smart contract is uploaded on-chain, it cannot be altered or tampered with once deployed.
Let's illustrate smart contracts with an example:
Josh is buying a lamp on an internet marketplace from Annie and wants to send her money in the most efficient and secure way. Josh codes a smart contract on the Ethereum blockchain that says this: the contract receives ETH from Josh and locks it until both sides provide confirmation of completing their part of the deal.
- Annie confirms that she has sent the lamp.
- Josh confirms that he has received the lamp.
- Once both conditions are fulfilled, the ETH is released from the smart contract to Annie's wallet.
This is just a glimpse of what smart contracts can do. They are able to perform much more complex functions, such as operating with external data (oracles), creating and deploying other smart contracts, and so on.
Future Prospects
Smart contracts bring unprecedented utility into blockchain ecosystems. Without smart contracts, the whole DeFi would not exist, because blockchain by itself is simply a ledger able of retaining certain data.
If you compare Ethereum with Bitcoin, which does not possess smart contracts, you will get a pretty accurate representation of the simplest application of blockchain - strictly financial.
However, with the development of smart contracts, performing almost any action on-chain could be automized, resulting in much more than financial applications. The main benefit of smart contracts lies in removing the need for a third party and therefore making the whole system much more trustless.
Though we are still early for mainstream applications, there already emerge smart contract services in real estate, supply chain management, legal, and so on, making it only a matter of time before they integrate into out everyday lives.
