Blockchains are changing the way data is recorded, processed, transmitted and used. They are synonymous with transparency, democracy and access. As we constantly discover new areas of application of this revolutionary technology, we continue to develop it to open up new opportunities. That's where smart contracts come in handy.
Smart contracts are the laws governing the blockchain
A traditional contract is a specific agreement that defines a set of rules between two or more parties. Similarly, a smart contract is pretty much the same, except that it is written in code and programmed in the blockchain. Thus, like any other data set, the network securely stores them in each node. No one can change or delete them.
However, what smart contracts do is that they are executed by themselves. Since they work on the blockchain, they are automatically applied without the supervision of a third party.
In addition, they eliminate another common problem of traditional contracts: misinterpretation. The code does not depend on an opinion or point of view; it is objective. It doesn't matter, just the functionality. The only thing that matters is that it works.
To sum up, smart contracts are a series of rules and commands written in code and executed on the blockchain. They set the conditions under which users interact with each other.. They are immutable, cannot be deleted and are available to everyone.
How do smart contracts work?
we have already said, smart contracts set the rules that users agree to when interacting. They also set the conditions necessary for its implementation. Then and only then will the transaction pass and appear in the block chain.
Suppose you want to buy a car from an innovative representative office that accepts cryptocurrency as payment. They have a platform programmed and running on Ethereum. Simply put, their smart contracts establish the following rules:
-The car costs 15 ETH.
-When the dealer's wallet address receives 15 ETH, the platform generates 1 (one) token as proof that the purchase has occurred.
-The wallet that made the payment in the amount of 15 ETH will receive this token.
Now all you have to do is go to the dealership and hand them your token as proof of payment in exchange for a new car. It's all done! Of course, this is a simplified example showing how smart contracts work, but you get the gist: no fees, no banks, no brokers, no third parties at all. Transactions take place only when they meet the conditions set out in the smart contract and are agreed upon, so everyone is satisfied. The information is safe and is recorded in an indestructible ledger. Everything is done with a line of code.
Features and Benefits
In addition to processing payment transactions, smart contracts have an infinite number of use cases. Management, economics, health, marketing, whatever! Their usefulness ranges from the simplest applications to more complex solutions. The potential is limitless, as every organization, institution and business uses data for their daily activities.
Moreover, smart contracts and cryptocurrency feed each other, as the development of one stimulates the adoption of the other. New options for using smart contracts open up new opportunities for cryptocurrencies. Conversely, the introduction of cryptocurrencies stimulates the demand for the development of smart contracts. It's almost a perfect cycle.
However, utility is just one of the advantages of this technology. There is also practicality. For example, from the first quarter of 1 year, you cannot do business from Argentina with someone in Singapore without paying a ridiculous amount of taxes, without going through customs and without obeying the will and methods of financial institutions. At least not in the traditional way. Thanks to smart contracts, you can do this not only easily, but also without the intervention of third parties. Not to mention the complete absence of taxes. Your only expenses will be the miners' fees. Simple, instant, independent and economical.
Smart contracts are such a valuable technology that Binance has developed a completely new blockchain, the Binance Smart Network, to work in parallel with their original block chain and provide support for smart contracts.
In fact, the entire DeFi ecosystem is possible thanks to smart contracts. Each DEX, loan platform, liquidity pool, betting pool, etc. operate on smart contracts that define the parameters by which they operate. They also allow you to create new assets in the blockchain, such as wrapped tokens, stablecoins, NFT or LP tokens.
Risks and disadvantages
Although smart contracts open up a horizon of new opportunities for development, they may have some setbacks.
First of all, programming languages are a special area in which most people don't know much. If you don't know how to code, you will work and invest in a system that you don't understand, which is always a dilemma. As we have already said, smart contracts are the laws governing the blockchain. Misunderstanding these rules can lead to serious problems for anyone who does not take precautions.
This leads us to another potential risk: programming errors. Although the code is indisputable, people write it, and they can really make mistakes. Incorrect code can be affected by exploits. Just as hackers can exploit the legal vacuum and fine print in traditional contracts, the same can be done with erroneous smart contracts.
Many platforms, for example a year.Finance has been attacked due to an error in their code, due to which many cryptocurrency users lose their money. Fortunately for everyone, you can protect yourself from this kind of risk by using open source platforms that publicly share their code so that everyone can review it and find weaknesses. Private audits are also common practice, but in such cases you should trust both the auditor and the auditee.
Final thoughts
If information was transmitted in cars, and blockchains were the streets they drove through, smart contracts would be a set of signs, traffic lights and rules that you need to follow to get to your destination.
We hardly discover the world of blockchain and smart contracts. Some institutions are already developing innovative solutions in various aspects. Thanks to this technology, we can only expect a brighter future in terms of how we deal with personal finance, data management, or simply interact with each other over the Internet.
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