A keystone of the crypto ecosystem, smart contracts were first mentioned in 1994 by Nick Szabo . The programmer wanted to “ enable strangers, who have no way of trusting each other, to transact securely .”
- Definition and operation of smart contracts in crypto
- Smart contracts in crypto, the revolution not always easy to understand
- Conclusion on the smart contract
Definition and operation of smart contracts in crypto
What is a smart contract?
Smart contracts, or intelligent contracts, are self- contained computer programs, executed when predetermined conditions are met. This concept was designed to ensure the binding force of contracts through computer code .
This protocol is built on a system of conditions using IF/THEN conditions: IF condition A is met, THEN B must be executed. If and only if the conditions are met, then the smart contract will execute and be submitted to its validation by the nodes. The smart contract replaces the role of the trusted third party in an exchange. Smart contracts are digital “contracts” stored on the blockchain to enable automated , secure and decentralized exchanges .
How a smart contract works
Similar to a traditional legal contract , although it is not yet legally recognized, this one is automated and does not require any intermediary to validate the contract between several parties. The terms of the contract are translated into computer code .
When the code is finally created, it is stored on the blockchain and replicated among network participants, so that the code is executed by all validator nodes . If the conditions of the contract are satisfied and verified by all participants of the blockchain network, then the corresponding transaction is executed and then validated .
Transaction fees (gas fees)
“Gas” refers to the transaction fees needed to compensate for the computational energy essential for validation by network nodes. Just as Satoshi Nakamoto theorized and applied it to his protocol for Bitcoin, it is essential to remunerate miners/validators in order to ensure their interest in securing the network. Because if miners perform the important tasks of verifying and processing transactions on the network, they can also corrupt it by attacking it. It is therefore essential to remunerate them to ensure the operation and security of decentralized networks.
Note: Transaction fees are a major element of competition in the cryptocurrency market. Ethereum is particularly targeted for its very high transaction fees and is the work of many critics. So developers are implementing lots of solutions to fix this issue.
Smart contracts in crypto, the revolution not always easy to understand
The smart contract, a digital trust tool
The smart contract could therefore become a real revolution for contractual relations by eliminating trusted third parties while ensuring the security and trust necessary for the automation of contracts. Only computer code can define whether a contract has been fully or partially executed, making these protocols “intelligent”. Some cryptocurrency protocols like Ethereum have virtual machines so that each node can execute autonomous contracts .
A smart contract is not exactly similar to a contract in the classic sense, its name “contract” comes from the fact that it is a computer program that applies previously defined clauses . As a reminder, they have no legal value to date , no recourse against theft is still possible as long as the legislation does not recognize this innovation on the legal level.
What applications for smart contracts?
Smart contracts play this role of accelerator built to facilitate and secure transactions on decentralized networks , but they also allow the conservation and exchange of data. Because if we first think of the exchange of cryptocurrencies, these can actually be very useful for industries and apply to many fields. Many sectors will be impacted by the cryptographic revolution and the advent of the Internet of Things (IoT) .
More than just a means of exchange, smart contracts are carriers of information, and can therefore play a major role in the economic, logistical and organizational strategies of companies:
- Securing a deal with blockchain immutability and transparency
- Limit the cost of intermediaries , such as notaries or lawyers, for the development, monitoring and signing of a contract
- Reduce the risk of errors and interpretations
- Simplify transactions between different actors
- Automate contractual obligations , such as payment. This eliminates the risk of non-payment, by an automatic transfer of funds, which will have been placed in escrow for example
Conclusion on the smart contract
Blockchain and cryptocurrencies offer everyone, governments, companies, developers and individuals the power to exchange, innovate and build an ethical, transparent and secure internet. In order for Web3 to be built, cryptographers and developers have developed this complete and optimized ecosystem, of which smart contracts are a pillar that will transform exchanges and interactions by implementing a new digital trust system .