What is the smart contract?
A smart contract is a list of obligations described in code form and protocols for the fulfillment of these obligations by the parties.
The basic idea of smart contracts is that hardware and software can greatly assist us in entering into many types of contractual relationships (for example, in the area of collateral, delineation of property rights, credit relations, purchase and sale, etc.). Smart contracts provide an opportunity to safely exchange money, shares, property and other assets directly, without the participation of intermediaries.
Suppose you want to buy a mobile phone from the hands on the trading platform on the Internet. But it is not possible to see the reviews, and the seller asks for prepayment.
— He is reinsured, fearing that if he sends the package on delivery, you will not take it and he will lose money for delivery, that is, he will lose money.
— You, from your side, are afraid that the seller will turn out to be a fraud, will appropriate your money and not send your phone, or send something completely different.
The problem of trust can be solved with the help of smart contracts that will monitor the fulfillment of the obligations of both parties set out in the contract, apply sanctions in case of violation or non-fulfillment of the terms of the transaction.
“Smart” contracts provide security and are free from the risk of ambiguous interpretation of the terms of the transaction, thanks to cryptography. Operations with the use of this technology are more profitable financially, since a person does not have to pay lawyers, sue in case of non-fulfillment of obligations, pay to third parties (intermediaries) who would assist in carrying out the transaction.
History of creation
Back in 1994, a cryptographer and legal expert, Nick Sabo, realized that using a decentralized registry, you can enter into electronic, self-executing contracts. They can be written as a code.
Only in 2013, smart contracts began to be put into practice in the Ethereum project, which was newly created at that time. Its creators were the first to propose a protocol scheme allowing payment of digital currency subject to certain conditions.
On the basis of Ethereum thousands of different projects have already been launched for different purposes. Among the Ethereum competitors we can see quite strong projects, for example: EOS, Cardano, NEO, Waves.
The principle of operation of smart contracts
Smart contracts are programs that are created using code. That is why the parties to a transaction or contract can be sure that all the terms of the contract will be met, and no one can change the terms or interpret them for themselves.
Code is the law of smart contracts
Smart contracts only respond to transactions. The Ethereum team explains the work of smart contracts like this: The asset or currency is transferred to the program (smart contract), after that it (the program) begins to monitor the fulfillment of the contract terms. As soon as they are completed, the seller receives the money, and the buyer the goods.
The work of smart contracts can be compared with vending machines, where they sell all sorts of things. Throw a coin and get the goods without intermediaries, without the help of third parties.
The simplest example of using smart contracts is multi-signing. With this signature, the parties to the agreement can freeze a certain amount of coins on the blockchain so that, if necessary, more than half of the participants will need to sign it. Such a condition of the contract ensures the safety of funds invested in the project. In case of failure, the funds will be returned to the investor automatically. If the collection of the claimed amount was successful, then the participants of the multi-signature will activate their keys, confirming the good faith of the project in which they are investing.
Smart contracts can be used for any financial activities in the field of insurance, registration or transfer of property, lending. The most widespread distribution of smart contracts is observed in the business sphere, where payments and actions due to payments are assumed.
In addition to business and cryptocurrency, they can be applied in completely different areas and tasks. Everything is limited only by human imagination.
Advantages and disadvantages of smart contracts
Despite the great benefits that smart contracts have in themselves, they have significant drawbacks. Developers continue to work on fixing these problems.