Smart contracts – everything you need to know

Ludvig
18.02.2022
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Smart contracts crypto

The cryptocurrency not only gave us a whole new way of payment method. It also gave us a number of new concepts that one had to learn the meaning of if one wanted to be part of the development.

In connection with cryptocurrency, it is not uncommon to hear concepts such as blockchain. This is a term that refers to the technology that many cryptocurrencies are made of.

Bitcoin was the starting point for it all , but eventually we were also introduced to a cryptocurrency called Ethereum. This cryptocurrency introduced a completely new technology, which we today know as smart contracts.

Smart contracts are a fascinating technology, which at first may seem a bit complicated. In this article, we will therefore take a closer look at this technology.

A nice video that explains smart contracts:

What is a smart contract?

A smart contract is a contract that is executed when all the conditions in the contract have been met. When something is based on a smart contract, and the conditions are met, the contract runs automatically. This is usually done on a decentralized blockchain.

Thus, we can state that smart contracts are on the same street as the decentralization technology we were introduced to when Bitcoin took the world by storm and infiltrated people a few years ago.

It was the cryptocurrency Ethereum that made the concept of smart contracts widely known, but it is not only in connection with cryptocurrency that this technology is used. However, this is something we will return to a little later in the article.

The idea can be traced back to the 90s

Smart contracts are based on an idea that can be traced all the way back to the 1990s. Based on what we know as of now, it was Nick Szabo who came up with what is today recognized as the first definition of a smart contract. This happened in 1996.

As most people know, a contract is an agreement between two or more parties. Nick Szabo describes the concept in this way: “one of the most solid components of a democratic society that works properly”.

But according to Nick Szabo, traditional contracts have a slight weakness. It is that the maintenance of these contracts will gradually become more and more challenging as we find ourselves in a digital world. The solution to this problem was, according to Nick Szabo smart contracts.

Smart contracts are a smarter variant of traditional contracts. Nick Szabo defined the smart contracts in this way: “a digitized contract based on a set of terms with protocols that act in accordance with the terms when these are met”.

Interview with Nick Zsabo:

This is how a smart contract works

In some cases, smart contracts can appear as a rather complicated concept, but by breaking it down into smaller pieces, you will easily see that it is not really that complicated anyway. Also in connection with how smart contracts work in practice – in a simple way – you can highlight Nick Szabo’s own description.

According to Nick Szabo’s definition of the term, one sees that a set of conditions must be met for the rest of the process to take place. Here, parallels can be drawn to a relatively well-known logic that “if this, then that”. We also have this saying in Norwegian: « If A, then B ».

With this as a starting point, we can take a closer look at which other contexts smart contracts are used. Nick Szabo himself was very fond of a specific example, and it was about the good old soda machine (or another type of machine that sells something). This is a concept that most people know how to work:

  1. You walk past a vending machine and see something you fancy, and find the money you need to buy what you want. The money is put on the machine.
  2. After you have put the money on the machine, you choose the product you want. This can be a soda, a type of snack, various medicines or something else.
  3. The vending machine’s machinery double checks that you have given enough money so that they can give you the product you have requested.
  4. If the number of kroner corresponds to the price the machine should have to give you the product, then it may fall into the hatch. There you can pick it up and take it with you wherever you go.

If one thinks theory, what does this sound like? Yes, a smart contract! Something as common as a vending machine is built on the basis of a smart contract. There are also a number of other things that smart contracts can be used for, and some of them we will take a closer look at below.

Smart contracts can be used for this

However, it is not only in connection with the purchase of soft drinks and various vending machines that the use of smart contracts may be relevant. Smart contracts are a tool that can undoubtedly make life easier in several different ways.

Smart contracts can, for example, be implemented in several aspects of daily life, including in connection with the payment of bills. When it comes to this, paying rent will be a good example. It does not matter to what extent you have the role of landlord or tenant; a smart contract will in any case benefit both parties:

  1. The landlord and tenant agree on which payment solution to use, and then both parties connect their bank accounts to this payment solution.
  2. The current payment solution is registered in a smart contract.
  3. The smart contract also stores relevant information for the agreement, such as how much the tenant must pay in rent, and what date in each month the rent is to be paid.
  4. Thanks to the smart contract, the relevant amount will be deducted from the tenant’s account and transferred to the landlord’s account every single month without any of the parties having to do anything.

More use of smart contracts will undoubtedly make people’s lives easier. The systems used today are based on trust to a much greater extent. Not that there is anything wrong with that, but implementing smart contracts will be beneficial for a number of processes.

Implementing smart contracts in how to pay bills is just one example. There are many other examples of where smart contracts will have an exclusively positive effect:

  • A voting system based on smart contracts will be able to prevent cheating and have a preventive effect against corruption.
  • In connection with the sale of real estate.
  • Implementation of smart contracts may have been effective in connection with how organizations are managed and secured.
  • Smart contracts in connection with various processes in the health care system would effectively a number of processes in this case.

Lectures on smart contracts and how this will change the world (from reputable TedX ):

Advantages and disadvantages of smart contracts

Above, we have looked at how smart contracts already work in practice, as well as a number of situations where the implementation of smart contracts will undoubtedly have a positive effect. Therefore, it goes without saying that there are a number of benefits to using smart contracts:

  • Implementation of smart contracts in a number of situations will undoubtedly contribute to several of the processes in the current situation being streamlined, for example in connection with the payment of bills. At present, one is dependent on a bank, which is a third party, but with decentralized technology, the need for the third party will disappear and thus streamline the process.
  • Smart contracts will minimize the chance of corruption. The reason for this is that since the technology is decentralized, the process takes place in a slightly different way. This technology is closely linked to blockchain technology, which means that for a transaction to go through, for example, the transaction in question must be approved by a large number of users on the blockchain. This also minimizes the chance of being hacked.
  • Because such a transaction only goes through by being approved by x number of users, it leads to increased trust in everything that takes place on the blockchain in the long run.

In addition to these benefits, it is not to be underestimated that everyone will save time on smart contracts being implemented here and there. And you do not have to worry about the execution being sloppy due to the technology on which the smart contracts are based.

But even if the implementation of smart contracts would be very beneficial, it does not mean that it is only positive. This can, like so much else, also lead to some disadvantages that it is also important to highlight:

  • The smart contracts must work in accordance with national laws and regulations, and since no one has tried it, it is difficult to say how it will go.
  • A small error, such as incorrect coding, can have very big consequences.
  • The technology that both blockchain and smart contracts are based on is based on anonymity, and legally this can be a problem.

Are smart contracts the future?

There is at least one thing that is certain and certain, and that is that smart contracts are used here and there in society. But is it in the cards that the implementation of smart contracts will take place to a much greater extent than it is to date?

It’s no secret that Ethereum is actively using it, and more and more companies are embarking on this trend. It definitely seems that smart contracts have come to stay, but whether they manage to beat out the traditional agreements – it is quite uncertain at the time of writing!

Author Ludvig

Ludvig har lang erfaring med kjøp og salg av kryptovaluta. De senere årene har han tatt det til et nytt nivå og prøver å leve av kryptovaluta trading. Han følger godt med på markedet og har opparbeidet seg god kompetanse på teknisk analyse mm. Vi er veldig glad for å ha Ludvig med på laget, og er det noe du lurer på angående kryptovaluta er dette mannen du spør!