What are Smart Contracts?

I'm sure many of you have heard of smart contracts. If you don't know what smart contracts are and how it works, then you are in the right place. This article aims to help you get smarter about smart contracts.

What are Smart Contracts?

To understand what smart contracts are, we need to understand the differences between smart contracts and traditional contracts. Traditional contracts are sets of agreed-upon terms described in a natural or human language. The judicial system usually adjudicates contractual disputes and enforces terms. Smart contracts are blockchain-based computer programs that automatically execute according to the terms of a contract.

Below are the benefits of using smart contracts:

• More Secure: Smart contracts are stored on blockchain, so it enjoys the benefits that blockchain brings. It is safer because it is encrypted. In case of any data loss, originals can be restored.

• Faster: Smart contracts auto-execute tasks using computer code.

• Cheaper: Smart contracts are cheaper for 2 reasons. First, it eliminates the need for 3rd-party intermediaries to enforce, thus saving money. Second, it eliminates various business processes because it automates tasks.

How are Smart Contracts used?

Smart contracts can be used in many different areas. Here I'll focus on two very notable use cases: Decentralized Finance (DeFi) apps and NFTs. They both rely on smart contracts.

DeFi apps provide an alternative way of trading, investing, lending, or borrowing without using traditional financial services like banks. DeFi apps use smart contracts to auto-execute financial transactions. The terms of a transaction are written in the code. So when certain conditions of the smart contract are met, the financial transaction will automatically happen with no 3rd party involved.

NFT, short for non-fungible token, is a non-interchangeable unit of data stored on a blockchain such as Ethereum, that can be sold and traded. It is a way to represent unique items as a blockchain based item. NFTs are created using smart contracts that assign ownership and manage the transferability. If you want to learn more about NFTs, please read my article How to Create Your First NFT - A Step by Step Guide

Looking ahead to the future...

Quoting the famous American futurist Roy Amara, "We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run". Even though there were a lot of hypes around smart contracts due to the exploding interest in NFTs and DeFi during the pandemic, I think smart contracts are still in nascent stages of adoption. The blockchain technology that smart contracts rely on is still a very new technology and it will keep evolving. I do believe smart contracts have potentials to revolutionize a lot of areas because they are more secure, faster and cheaper. Let's see how smart contracts will play out in the future.