Many historians consider that the evolution of humanity can be traced altogether with the evolution of contracts. But let’s talk crypto, and this time, we will leave the purchase of bitcoin advice to talk about the importance of smart contracts.
More recently, the rising popularity of blockchain technology led to the creation of smart contracts, which are immutable digital contracts that eliminate common issues associated with human behavior and permit transactions to be more secure and reliable.
In order to understand what smart contracts are, it is crucial to understand what a blockchain is and how smart contracts depend on this technology to fulfill its purposes.
Essentially, a blockchain is a chain of blocks that contains information. Although the concept of a blockchain is not new, its first materialization occurred in 2009, when Satoshi Nakamoto published the whitepaper that would lead to Bitcoin’s birth.
A blockchain is a distributed ledger that is completely open and uncensored for all users. Once some data has been recorded inside a blockchain, it becomes almost impossible to change it.
In a blockchain, each block consists of a piece of data, a hash, and a hash of the previous block. A hash can be compared to a “blockchain fingerprint”, as it is unique and identifies each block and all its contents.
Anything that changes inside a block causes its hash to change, which means hashes are crucial when users want to detect changes in the blocks. Hence, the world that defines a blockchain is immutability- once something is added to it, it is quite hard to change.
A smart contract is a piece of code that can be executed automatically in a deterministic manner. Typically, the code of any smart contract is executed in a blockchain ledger, which makes it trustless and secure.
The main purpose behind the creation of this technology is to remove the human factor from decision-marking, which provides next-level reliability and efficiency.
The use of smart contracts generated an upheaval in the world of crypto finance due to its innumerous capabilities, such as receiving, storing, and sending funds. Also, smart contracts can interact with other smart contracts.
Even though the concept behind this unique technology may sound a bit too complex, smart contracts are fairly simple to program.
A smart contract only is fulfilled when certain parameters are met. Plus, it upgrades transactions and removes middlemen in exchanging processes, meaning for example that a user will receive his tokens A only when the other party in the transaction sends his tokens A.
Smart contracts are autonomous, secure, cost-effective, and fast performing by nature, which means they can be utilized for countless use cases that vary according to each company’s segment.
Nowadays, the main use cases of smart contract technology include:
Ethereum is one of the most notable examples of a cryptocurrency using smart contracts. And as you can see, their usage has led the ETH price to hit over $4,000 in 2021.
Smart contracts can either rely only on information available in the blockchain or utilize external data sources. However, relying purely on real-world data sources has a huge trust factor involved.
As a way to bypass this issue, smart contracts relying on real-world data typically use oracle services (e.g., Chainlink). Even though oracles serve to minimize the issue, there is still a need to trust the oracles themselves.
Consequently, smart contracts are one of the results of the evolution of blockchain technology. Ethereum’s inception in 2015 opened the gateway for the second generation of the blockchain industry, which introduced decentralization and other important concepts.
Following this wave of innovation, the rise of smart contract technology brought automated processes to the blockchain network, which eliminated the need for intermediaries and elevated the level of security and transparency through the ecosystem.
Another crucial factor that had a huge influence on the success of smart contracts was Solidity, the programming language utilized by Ethereum.
Smart contract technology is an innovative and much-welcome solution that is already transforming the way people deal with blockchain applications, especially in the world of decentralized finance.