What are smart contracts and how do they work?

As you learned in the Academy’s Beginner section, smart contracts basically act as fuel for the growth of the Ethereum network, in line with Ethereum’s goal of further increasing blockchain use cases.

A smart contract is a self-fulfilling digital representation of a traditional contract.

The Ethereum network popularized large-scale smart contracts

A smart contract is the foundation that contains the fundamentals of every ICO

In this lesson, you will learn everything there is to know about smart contracts.

What are smart contracts?
The first forerunners of smart contracts were POS payment terminals and vending machines. To use a vending machine, you enter the amount of money that is equivalent to the price indicated for the item you want and, in a few moments, you receive the item directly through a slot in the bottom of the machine.

Thus, in this purchasing process, both the receipt of the payment and the release of the item are automated. In essence, smart contracts are created to automatically execute and complete processes, such as a payment process, in digitized form.

In this purchasing process, both the receipt of payment and the release of the item are automated.

Digitized execution
In 1994, Nick Szabo, a highly respected cryptographer and authority on Ethereum,

had the idea of using computer protocols to support the execution of contracts on computer networks.

“Smart contracts reduce the transaction costs imposed by procurers, third parties or their tools. The contractual stages of seeking, negotiating, engaging, executing and awarding constitute the realm of smart contracts. This article covers all stages, with an emphasis on performance. Build a cross chain bridge use protocols and user interfaces to facilitate all stages of the bargaining process. This gives us new ways to formalize and secure digital relationships that are far more functional than their inanimate paper-based ancestors. “

Immutable contracts written in code
Ethereum smart contracts are self-executable, immutable contracts written in computer code. They are autonomous, precise and immutable. The reason Ethereum , and not Bitcoin , is the preferred technology offered for the application is Bitcoin’s limited scripting capability.

In some ways, smart contracts are similar to the digital representation of traditional contracts; however, they are essentially a set of functions and data stored on specific addresses on the blockchain. The data can be consulted using functions that depend on the implementation of the Bridge Smart Contract Development Services, for example to check if an account has access to the funds to be transferred.

Ethereum smart contracts are self-executable, immutable contracts written in computer code.

Mental transaction costs and market translators
Szabo argued that mental transaction costs — that is, a consumer’s thought processes before making a purchase decision — have placed a much greater obstacle in agreeing on the terms of a contract than computational transaction costs. Mental transaction costs are caused by a party’s assessment of whether or not something is worth buying. Cross chain bridge development solve this dilemma because they are coded to respond to the environment according to certain contractual terms, such as price signals, customer preferences, or any other type of desired event.

The so-called market translators, in their most basic form, automatically obtain the market prices and enter the partial preferences of the user before “translating” the “origin contract” into the “target contract”. Szabo outlines this mechanism in the analogy of Alice and Bob negotiating, via market translators based on their preferences and market prices, until the smart contract is executed.

Use cases of smart contracts
Thus, a smart contract consists of a code that executes itself once certain conditions are met.

The range of applications is vast. First of all, smart contracts are particularly suitable for use in financial and banking services, such as for payments, liquidations and mortgages. Other potential use cases include applications where forecasting and escrow are involved, such as disbursing funds in case certain conditions are met, as well as insurance claims and inheritances, facilitating procedures and no longer requiring an intermediary. To conclude, the large-scale use of smart contracts began with the emergence of ICOs , where smart contracts allow for transparent and fair conditions for the sale of tokens.

Smart contracts are particularly suitable for use in financial and banking services, such as for payments, liquidations and mortgages.

On the other hand, since the contract works exactly as it is coded and can never be changed, the immutability of a smart contract can also turn out to be a curse rather than a blessing. Therefore, any mistake in the code of a smart contract can carry risks and consequences, such as distributing the wrong amount to the wrong recipient.