What you'll see in the blog: Ethereum Smart Contracts - Who Made It, How It Works, and How to Use It?
Ethereum has unveiled an entirely fresh realm of innovative technologies and an unparalleled user encounter. Automated distribution, intelligent online marketplaces, monitoring of medical records, and even a server-less internet have been made possible through this groundbreaking platform.
The transformative impact of smart contracts on our lives may not be immediately visible, but they have the power to remove barriers and enhance transparency in various types of transactions. While the concept of Smart Contracts was initially introduced in 1994, it has now found its rightful place within the realm of public ledgers. How exactly are smart contracts evolving and shaping a world without intermediaries? In this blog, we delve into the fundamental principles of smart contracts and explore their practical implementation in real-life scenarios.
What are Smart Contracts and what are they used for?
A smart contract represents a computer code-based agreement between two individuals or parties. Executed on the blockchain, it ensures that the code remains unalterable. This contract is designed to automatically execute when specific predetermined conditions are fulfilled. By leveraging the immutability and transparency of blockchain technology, smart contracts enable secure and trustless transactions between parties involved.
To better understand the working principle, let’s dive into the example:
In a scenario where one person intends to purchase another person's house and wishes to utilize a Smart Contract for cost savings, the following process can be employed.
Both parties mutually agree and draft a Smart Contract specifying that upon the transfer of 500 Ethereum from the first person's digital wallet to the second person's digital wallet, the ownership of the house will automatically be transferred. Subsequently, this Smart Contract is deployed onto the blockchain, ensuring complete protection from external influences.
Alternatively, if the two parties opt for traditional methods without utilizing smart contracts, they would require an intermediary such as a bank, a government entity, or one of its affiliated organizations to facilitate the agreement. This intermediary would be responsible for overseeing the transaction and ensuring its compliance with legal and financial regulations.
The efficiency of Smart Contracts is attributed to the underlying technology of blockchain. While blockchain is commonly associated with cryptocurrencies, its utility extends beyond that realm. It can be leveraged in various sectors and activities that involve the need for agreements, including but not limited to real estate transactions, healthcare services, and more.
Who created Smart Contracts?
The concept of Smart Contracts was indeed initially introduced by Nick Szabo, a prominent computer scientist from the United States, in 1994. Szabo's visionary idea laid the foundation for the development of Smart Contracts as we know them today. However, due to the lack of a suitable technological environment at that time, his concept could not be fully implemented.
Before inventing blockchain technology, Nick Szabo described the whole working principle in his book ‘Smart Contracts: Building Blocks for Digital Free Market’ in 1996.
With the emergence of blockchain technology in 2009, smart contracts transitioned from conceptual ideas to practical applications. The introduction of blockchain provided the necessary infrastructure to implement and execute smart contracts efficiently. This technology has revolutionized various industries by streamlining processes and eliminating the need for intermediaries.
How Do Smart Contracts Work?
In a blockchain system, a user deposits a specified quantity of cryptocurrency into a smart contract, resulting in the desired item being transferred to their account. The user has the ability to define the conditions, regulations, and additional specifics necessary for the successful execution of the smart contract.
Therefore, users can predetermine the conditions. Smart contracts have several unique features:
This implies that the funds are expended solely when the predetermined percentage of individuals reach a consensus.
Utility to Other Smart Contracts:
Smart contracts can exhibit interdependence, where the execution of one contract triggers the initiation of the subsequent contract.
When a contract is made or executed, it is stored immutably in the blockchain as history.
To execute a smart contract, the user is required to compose a code in Solidity or Vyper programming languages and possess an adequate amount of ETH coins to deploy the contract. Technically, the deployment of the contract involves initiating an Ethereum transaction.
What do Smart Contracts give us?
As you may have guessed, smart contracts are a step forward in technology, specifically they give us the following advantages:
• Smart Contracts effectively address the problem of trust, since they are automatically activated according to predefined conditions.
• Smart contracts operate based on the IF-THEN principle, providing a mechanism that ensures the thorough execution of the process. IF A happens, THEN B follows.
In addition, one of the main factors is the absence of a third party in the agreement. This allows users to save time and money.
How Smart Contracts are used in Real Life?
There are numerous approaches to implementing smart contract technology, and its widespread adoption began around 2016-2017. This technology finds application in various financial services, including money transfers and loan payments.
Nevertheless, the potential applications of smart contract technology are virtually limitless. It can be employed in diverse sectors such as insurance, legal processes, healthcare systems, logistics, government operations, real estate, and many more.
Insurance: AXA, a French insurance company, conducted initial trials of flight-delay insurance utilizing smart contracts. Under this system, if a flight experiences a delay beyond a predetermined timeframe, the customer is automatically compensated.
Government: Smart contracts enhance the voting system by introducing ledger-protected votes that can only be decrypted using significant computational power. This ensures the security and integrity of the voting process.
Banking Sector: The world-famous Spanish bank BBVA issued the first 75 million loan using a smart contract.
Summary: Smart Contracts – Technology of the Future
Smart contracts represent a remarkable technological revolution that is increasingly permeating our everyday lives.
While there are aspects that require further refinement, once perfected, they have the potential to become the technology of the future. Smart contracts offer individuals the assurance of security and efficiency while significantly reducing the costs associated with intermediaries.
Over time, smart contracts will become integral to daily operations, similar to how banks introduced digital products for their customers in the past.