Guide: Smart Contracts

Smart contracts are made up of computer code that perform a set of pre-determined instructions on a blockchain.

Let’s take a closer look at what they are and how they work.

What are smart contracts?

Smart contracts consist of computer code that carries out a set of pre-determined instructions. With smart contracts, there’s no need to trust a middleman. No-one holds your personal information or verifies it. Instead, the blockchain verifies it.

How do smart contracts work?

A smart contract includes an instruction written in computer code that states, “if X happens, do Y.” A particular action will be triggered once the pre-defined terms have been met.

The terms of the agreement are digitally stored on the blockchain and therefore can be easily tracked, but once defined, cannot be altered. Both parties involved in the transaction must agree to the terms of the smart contract and can be sure that if the terms aren’t fulfilled, the contract won’t be completed.

Often, smart contracts are used as digital agreements that complete the transfer of cryptocurrencies without the need for an intermediary. Once the agreement has been set, the smart contract verifies that the terms have been fulfilled and the assets will be exchanged.

What are the benefits of smart contracts?

Let’s take a closer look at some of the benefits of smart contracts.

Secure: they utilize cryptography to ensure records cannot be altered.

Autonomous: they operate automatically, saving time.

Transparent: anyone can view the smart contract on the blockchain.

No-intermediary: there’s no need for a middleman to verify information as the blockchain does it.

Applications

Smart contracts have been applied in a number of areas, including banking and insurance, where assets are transferred after certain pre-defined terms have been met.

They are an essential component of the DeFi space and power popular protocols like Uniswap and Aave. DApps or decentralised applications can be considered a series of interconnected smart contracts. One smart contract can be used for just one type of transaction. A DApp can combine multiple smart contracts to complete more complicated things.

They also facilitate the trustless distribution of tokens in Initial Coin Offering (ICO) events.

Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.