Blog Ethereum Terms

What Is A Smart Contract And How Do They Work?

single-image

A smart contract is a term widely used in the blockchain world but it has existed before the advent of blockchain technology or cryptocurrencies. Smart contracts were first proposed in the 1990s by Nick Szabo, a cryptographer and computer scientist who others believe that he is the mysterious Satoshi Nakamoto. He has vehemently denied this claim.

Bitcoin, the first and most well-known cryptocurrency supports basic smart contracts although they are limited in nature. Vitalik Buterin later created Ethereum, a blockchain protocol designed specifically for smart contracts and addressing Bitcoin’s limits. The Ethereum platform has gone on to become one of the world’s most used smart contracts platform.

Buterin is regarded as the pioneer of smart contracts while Szabo is the visionary.

What is a smart contract?

In the traditional world, lawyers draft contracts which are then signed by the transacting parties, and enforced by law. Smart contracts are more like normal contracts except that there are no third parties and the conditions of the contracts are written into the code.

Smart contracts are basically self-executing contracts in which the terms and conditions between the concerned parties are written into the code. The contracts are only executed if the pre-determined conditions are met.

The code of the contracts is written and stored on a decentralized blockchain network. One of the most important features of smart contracts is that it eliminates the need for third parties and allows two parties to directly transact with each other.

Smart contracts can work independently or alongside each other. This means that a smart contract can be triggered once and the transaction is complete while in some instances, the execution of one smart contract could trigger a chain of other smart contracts until the transaction is complete.

When smart contracts are mentioned, the next thing people think of is blockchain technology. This is not always the case as it is possible to develop smart contracts without using a blockchain API.

Benefits of smart contracts

Smart contracts wouldn’t be widely popular as they are today if they did not offer users some benefits or advantages over normal contracts. Here are some of the benefits of using smart contracts.

Autonomy – smart contracts function very well without the need for a third-party intermediary. It gives the transacting parties complete control over the agreement.

Trust – smart contracts provide a trustless environment for parties to carry out transactions. As the data is mostly stored on a distributed, secure, and shared ledger. No documents can be lost, stolen, or tampered with. Using smart contracts does not require you to trust people you are dealing with or them trusting you. The platform is unbiased and facilitates fair transactions.

Efficiency – using smart contracts allows you to save a considerable amount of time that could have been spent on redundant and manual tasks such as printing loads of documents, transporting, and storing them in specific places.

Savings – traditional smart contracts make use of estate agents, notaries, advisors, and even consultants who charge a lot of money for their services – maybe rightly so. However, with smart contracts, their services are not needed and their fees can be avoided.

Safety – smart contracts are not easy to hack if they properly implemented. The contracts are secured by cryptography and can potentially keep your documents safe.

The negative side of smart contracts

Smart contracts are inherently still in their infancy. There is still a lot of research that needs to be done. Although they have a lot of promise, smart contracts have also proven to be problematic. The code that underlines the smart contracts need to be flawless and free from bugs.

This may not always be the case and vulnerabilities found in the contracts can be exploited by hackers. In 2016, the DAO, a decentralized autonomous organization, that had just raised nearly $150 million was hacked after cybercriminals exploited a bug in one of the smart contracts. This raised questions about smart contacts’ safety standards and exposed their immaturity at the time.

Other issues such as government regulation can arise in the future as the technology evolves. These challenges have existed only due to the young age of the industry but there is hope that it will evolve over time.

Who and how to use smart contracts?

It should come as no surprise that smart contracts are widely used in the crypto industry but just like blockchain technology, they are also finding great use in other industries.

Initial coin offerings (ICOs)

Many blockchain projects have been launched on the Ethereum (or similar) blockchain networks due to smart contracts capability. How does this happen?

An ICO is a crowdfunding exercise you use to raise money (mostly Bitcoin or Ether) for your blockchain project. You will need to create a smart contract and a token for the smart contract.

In your smart contract, you write code that stipulates how many tokens you are going to sell. You will specify the number of tokens you will release to a wallet address if certain Bitcoin or Ether tokens are deposited into your project account.

This automates the entire process.

Insurance

A number of insurance companies now utilize smart contracts. Two insurance companies in Malta and France developed smart contracts prototypes that compensate airline passengers if they experienced delays with their flights.

Healthcare

Healthcare systems can utilize smart contracts to record and transfer sensitive data. Smart contracts give patients complete control of their data. A new startup allows patients to sell their medical data to researchers.

Governments

Governments can make use of smart contracts in elections. This reduces election fraud.

Smart contract and lawyers

Many people believe that smart contracts will replace lawyers the same way that cryptocurrencies will replace fiat currency.

However, this will not happen any time soon. The best option might be for the two to work together. Instead of lawyers being threatened by smart contracts, they should at least try to utilize them.

Smart contracts are only code (and not the law) that automates the execution of a contract. They are not yet legally binding.

Beginners Guide To Crypto
Subscribe to get your beginners guide and our weekly digest
We respect your privacy.

You may also like

Blog Interviews Investing

3 Key Indicators To Watch From A Crypto Asset Manager

single-image

We asked Travis Kling, founder and CIO of Ikigai Asset Management, what his go to indicator is for investing in cryptos.

He gave us these:

Cross Coin Correlation: How correlated are all other cryptos to Bitcoin. Low correlation is a sign of a healthy market. The crypto market is known to trend with Bitcoin. If correlation decreases that means coins are able to survive without Bitcoin needing to perform well.

Trading Volume: Increasing trading volume shows higher quantities of any particular coin are being traded back and forth. This means more interest is coming into the market and therefore could mean more participants.

On-Chain metrics like transactions per day and active wallet addresses: This shows the technology is being used, people trust it, and there is a need for more innovation.

—–

Watch the full interview here: https://youtu.be/baPOC2yoK0M

View More Article
Blog Exchange Investing

Top Crypto Exchanges in Japan

single-image

Japan should be commended for the stance it has taken on the burgeoning cryptocurrency sector. In the crypto sector, the Asian country is known for two of the world’s biggest and infamous cryptocurrency exchange hacks – Mt. Gox lost $450 million in February 2014 while Coincheck lost nearly $530 million in January 2018 in separate data breaches. Despite these large-scale hacks, the country has taken a proactive approach to cryptocurrency regulation. This article takes a look at some of the top crypto exchanges in Japan.

Top crypto exchanges in Japan

In the wake of these catastrophic hacks, the country’s financial watchdog the Financial Services Agency (FSA) gave the cryptocurrency industry the right to police itself. The self-governing body, the Japan Virtual Currency Exchange Association (JVCEA) was tasked with the creation and enforcement of the industry’s own rules. The association formulates rules to protect consumers, curb money laundering,…

View More Article
Blog Interviews

Finding Your Crypto Investing Strategy | Travis Kling Interview

single-image

We recently caught up with Travis Kling of Ikigai Asset Management in Tokyo at TEAMZ Blockchain Summit.

In this interview, Travis tells us why he left Point72 to pursue crypto investing, his tips for new and experienced traders, and what he is seeing in the market for the future.

Please like, comment, and subscribe to our channel.

Questions:

  1. What made you decide to come to Tokyo for the summit?
  2. How is Ikigai Asset Management connected to Japan?
  3. How did you come across crypto?
  4. Why did you leave Point72 to pursue your own crypto investing firm?
  5. What was the conversation like when resigning from Point72?
  6. What advice do you have for a newbie investor getting into this space?
  7. What are your thoughts on a Bitcoin ETF?
  8. Do you have a go to indicator you’re always watching?
View More Article
Blog Cryptocurrency Terms

What is Litecoin? An Early Bitcoin Fork Nearly Identical to the Original Chain

single-image

In the world of blockchain and cryptocurrencies, there is a large number of forked protocols that inherit the majority of their properties from the parent blockchain networks. Litecoin is one such network forked from Bitcoin, the largest and most popular blockchain protocol in the world. It comes as no surprise that Litecoin’s technical details are slight modifications of Bitcoin.

What is Litecoin?

In the simplest of terms, Litecoin is one of the earliest Bitcoin forks. It is a peer-to-peer cryptocurrency created by Charlie Lee, an ex-Google employee and former Coinbase engineering director, based on Bitcoin code. Litecoin was released as an open-source software project on GitHub in the last quarter of 2011. At the time of writing, Litecoin is the sixth largest cryptocurrency with a market cap of $4.8 billion, according to CoinMarketCap data.

Litecoin vs. Bitcoin

The best way to understand Litecoin is to compare it…

View More Article
Blog Cryptocurrency Exchange Mining News

China Prepares to Ban Bitcoin Mining, Ripple’s Mixed Fortunes in Asia, and Binance CEO Wants Bitcoin SV to Behave

single-image

As young as it is, the cryptocurrency market never disappoints. China, which has never done a good job in hiding its hostility towards the crypto industry, is probably moving towards banning Bitcoin mining. Japan has may soon move away from the notion that Bitcoin is a virtual currency. Ripple had mixed fortunes during the week as it announced plans to double its headcount in Singapore as it prepares to expand its service offerings in the Southeast Asia region.

In an interesting turn of events, Binance CEO Changpeng Zhao warned that Craig Wright’s claim that he is the mysterious Satoshi Nakamoto may lead the exchange to delisting Bitcoin SV, an off-shoot of the November Bitcoin Cash hard fork.

In the tweet, Zhao stated that “Craig Wright is not Satoshi.”

Binance enters into partnership with crypto security firm CipherTrace

The world’s third largest cryptocurrency by trading volume…

View More Article