Blockchain

The Ins And Outs of A Smart Contract

June 4, 2019

By Team Basil Zaff

You already know how fascinated I am with blockchain technology if you follow my page regularly. Well, I’m here to help further your knowledge on the technology by going over the ins and outs of a smart contract and how it works. You really should be familiar with blockchain technology by now given it’s the technology of the future! If you follow blockchain technology, then you already know about Ethereum, which is the second biggest cryptocurrency with a market cap of more than $28 billion dollars. Yes, 28 billion! But in order to fully understand what Ethereum is, you’ll have to comprehend what a smart contract is since the two go hand-in-hand.

The cool thing about Ethereum is it’s more than just a cryptocurrency; it’s another platform that inhibits blockchain applications, allowing users to develop more on it. The Ethereum platform utilizes its own currency called Ether, which is how payments for transactions are completed. It works similar to a Bitcoin blockchain, which consists of a network of nodes (or computers) running the particular software that confirms transactions on the entire network.

But Ether is sort of more like fuel, unlike normal cryptocurrency since it’s needed to run applications and smart contracts on the blockchain. This is important to understand since it’ll help you better comprehend one of the main components of Ethereum blockchain, which is called a “smart contract.” This is now used by various cryptocurrencies thanks to the growth it’s provided Ethereum blockchains. But still not many understand it and wonder what a smart contract really is. That’s what I hope to answer as we take a deeper look at what it is…

The Purpose Of This Guide.

The main purpose of this guide is to help other better comprehend what a smart contract is and how they work. Although they might seem confusing at first, once you grasp the main points, the rest will become easier to understand. By the end of this guide, you’ll be able to explain what smart contracts are to others who are in the dark about this interesting topic. You’ll better understand why they were created, how they could be used and why it’s going to change society forever!

But before we get into the really technical stuff, I’m going to first give you some smart contracts history so that you know how it originated and why they were created. You’ll soon understand what i’s purpose is in blockchain technology.

The Origins Of Smart Contracts.

Smart contracts were first created in 1994 by a cryptographer named Nick Szabo. He came with the idea to record contracts in computer code, which would be automatically activated when certain conditions were met first. He wanted to remove the need for third-party companies like banks and figured code would be the best thing.

Because a third-party company isn’t needed, any transactions or contracts are able to be self-executed by computers on a trusted network. Szabo worked on this thought for many, many years and even wrote a book on the subject called, “Smart Contracts: Building Blocks for Digital Free Markets.” The book was really ahead of its time and the only problem was that this was published back in 1994 when blockchains didn’t exist yet.

Good thing for us because now it does! So when 2009 rolled around and Bitcoin introduced the world to blockchain technology, Szabo’s work now made more sense. Then in 2015, Vitalik Buterin founded Ethereum and showed us the first working smart contracts. (If you haven’t checked out our guide to blockchain technology, you can learn more about it here).

So What Is A Smart Contract?

By now, you might be wondering what the heck is a smart contract. Before I get into all the good stuff, it’s good to remember that I’m not just here to explain these things to you, but to help you remember what they are. To do that, I’m going to highlight some key points to read so that you can remember what smart contracts are easier.

Essentially, a smart contract is just an agreement between two people, but it’s in the form of a computer code that runs on blockchain technology. All these contracts are stored on a public database for all to see and can’t be changed whatsoever.

All transactions that happen within a smart contract are then processed by blockchains, so there’s no need for any third-party involvement.

You don’t have to rely on anyone to further the transaction or approve it. But, the transactions are only processed when certain conditions in the agreement are first met. The great thing about smart contacts is that there’s no one to rely on so there are no issues with trust.

The Inner Workings Of A Smart Contract.

Now that you know what smart contracts are, it’s time to learn how they work. But first, we’ll have to look at how they can be used. So let’s imagine that you want to buy your friends house. You two form the agreement on the Ethereum blockchain network using a smart contract with all of the terms. The agreement will lay out that you’ll get ownership of the house once you pay your friend the agreed upon amount for the house.

Once the smart contract is set in place, it can’t be changed, so you can feel 100% safe giving your friend the money for the house. If there were no smart contract for this agreement, you’d have to use a third party like a bank, lawyer or broker to negotiate the agreement. In this case, you’ll have to pay extra fees for their services.
Smart contracts eliminate the need for third parties, thus saving people loads of money because they don’t have to pay extra fees or commissions. There is also no delay in services, thus speeding up the agreement once it’s set and the conditions are met.

This is all possible thanks to blockchain technology and its decentralization capabilities. Smart contracts become fair and trustless since no one is in charge of the technology. No one party controls the blockchain so no third party is needed. Instead, the blockchain is hared on a database that’s on several computers called nodes.

Since it’s not owned by anyone and it’s decentralized, it’s hard to hack. One hacker would need to hack practically all of the computers on the network if they wanted to try and infiltrate the blockchain, which is nearly impossible. Because of this, smart contracts can run safely without anyone changing them. Using smart contracts to pay deposits for goods and services is not only easier, but also safer than traditional transactions.

How Smart Contracts Currently Being Used?

The sale of a home is just one of many ways smart contracts can be used in today’s world. That’s what’s great about them – they can be used for any type of transaction, regardless if it’s financial or not. The possibilities are endless, which is what makes smart contracts so appealing for many.

Smart contracts are already being used in various niches, including finance, insuracnce, legal process, credit authorization and even crowdfunding agreements. Now lets dive deeper to look at how they are already benefiting a few of these industries and how they’ll impact other industries in the future.

Governments.

Smart contracts can be very beneficial for governments all across the globe. That’s because they run on blockchain technology that can help prevent fraud and protect votes. There are actually many applications out there that could be utilized by governments, including FollowMyVote. They use blockchain technology to make voting systems trustless and more secure than traditional ways. Once the voting transaction is written to the blockchain, it can’t be changed whatsoever! Then once the voting is over, the smart contract will then send a token to the winner’s unique address (or wallet), alerting them of their victory. Using smart contracts will ensure that voting always remains fair.

Insurance Companies.

Smart contracts and blockchain diminish the need for third parties, which is why it’s a great technology for the insurance industry. There are two insurance companies that are already using it! Atlas Insurance in Malta and Axa in France tested smart contracts back in 2017 that compensated airline customers if the flights were delayed.

Here’s a real life example of how that would work.

Let’s say Frank is flying from Los Angeles to New York City. He sends Axa Insurance $5 in cryptocurrency and the smart contract is made. Then Axa will send $95 to the smart contract, totaling $100. So if the flight is on time, Axa is sent the entire $100 for the flight. But if the flight is late, that money is sent to Frank. The money is transferred automatically, so Frank doesn’t have to worry about anything. No broker or bank is also needed, making the transaction quick and easy.

Health Systems.

The health system is all about data safely and that’s exactly what smart contracts will provide. In fact, smart contracts are already being used in the medical industry!

Encrypgen is an application that uses this technology to transfer patient data securely and without the need for third party involvement. This ensures that no one else is viewing personal data. Patients are always in control of their data and if researchers want access to it, they have to pay for it.

Businesses.

Businesses that want to keep their costs low can really benefit from smart contracts. So instead of having to pay staff to run payrolls, reports and more, they can simply use smart contracts for free. Al they need to do is set up a smart contract for when the payment is due and where to send it. So others will always get paid on time and the process will be automated, saving businesses lots of money and time.

ICO’s.

Another great thing about smart contracts is that you can easily build your own project that utilizes the Ethereum blockchain technology. But you’ll need to have funds to do so and that’s where ICOs are helpful. ICO stands for “Initial Coin Offering” and is a unique crowdfunding system that you use to create new applications that benefit from blockchain technology. It’s sort of like a Kickstarter for blockchains, but the biggest difference is that smart contracts automate the process so that it’s secure.

Here’s an example of how it works so that you better understand the concept.

Let’s say you want to raise $100,000,000 to create your application on blockchain. So let’s say that it’s going to equal 10,000 Ether. You’ll have to decide how many ABC tokens you’re going to put into the smart contract, which are worth 0.1 Ether. Now you’ll have to sell 100,000 ABC token to fund the 10,000 Ether you’ll need to get everything up and running.

The smart contract will need to have all this information written into it so that the transaction happens instantly. It would look something like this: If 0.1 ETH is sent to the smart contract, then it’ll in turn send 1 ABC token to the unique address that first sent the .01ETH. So anyone giving to your ICO will automatically get the right ABC token amount. People buy tokens from ICOs so that they can use it on the application once it’s built and ready to go. Plus, the price of the token can potentially be worth more if the project is popular in the future.

How Smart Contracts Are Made?

Creating smart contracts can be done on various blockchain platforms like Ethereum and NEO. However, Ethereum is more popular for developers at the moment, which is why it’s mentioned so much in my guide! Smart contracts made on Ethereum’s platform use their original coding language that’s called Solidity. Developers use this language to create their smart contract for whatever purposes they want.

The Future of Smart Contracts.

Smart contracts have proven to be very helpful in a number of industries, which is why smart contracts will be the way agreements and transactions are made in the future! They’re already starting to replace the need for third-party entities, which can have a huge impact on the future. We won’t need real estate agents, lawyers or banks, for examples. We’ll all be able to handle our own transaction safely and securely, saving us a lot of time and money.
If more and more people jump on the smart contract bandwagon, we’d then live in a world without any middlemen! This would allow us to save a lot of money and we won’t need to put our trust in the wrong people or companies. It would, however, mean that many people could potentially lose their jobs.

But this is simply a scenario of what would happen if everyone started using smart contracts and blockchain technology. We don’t know what the future holds. But we can do everything we can to be prepared for all possible outcomes, including a future with no middlemen.

Smart contracts can easily make the world we live in a better place since we wouldn’t have to pay extra fees or commission. But smart contracts can do even more, reducing fraud, delays and the cost of many things. But it’s not without its downfalls since it could diminish the need for many jobs, thus putting people out of work.
Now that you know what smart contracts are, how they work and how beneficial they are, you’ll be able to explain them to everyone you know! So what do you think about smart contracts? Think they’re worth all the hype?