What is a smart contract and how does it work?

Digitalization has facilitated the automation of numerous processes, freeing individuals from mundane tasks. Among the essential tools enabling the transition of certain tasks to the digital realm and the monitoring of their execution are smart contracts. This article delves into the concept of smart contracts and their functioning.

What is a smart contract?

A smart contract is like a computer program on a special digital platform called a blockchain. Its job is to make sure agreements between people are followed. These people explain all the rules of their deal in this program and say what should happen if someone doesn't do what they promised. They also use digital signatures to show they agree.

The smart contract works on its own and checks if everything is done as agreed. If it's all good, it goes ahead and finishes the deal. It can help move things like money, shares, or even property from one person to another. It can also decide if someone needs to pay a fine, or if they can't use what they agreed on.

Smart contracts are like special computer codes inside a blockchain. They're used to lay out all the details of a deal, just like in a contract you sign on paper. But with smart contracts, the signatures are electronic, not physical.

Every rule in a smart contract is a must-follow rule. Only when everything in the contract is done, the deal is finished. Both sides get what they agreed on – like adding cryptocurrency to a digital wallet.

The big rule is that the smart contract's plan must be followed exactly. Smart contracts are super handy for things like decentralized projects (DeFi, DApps, etc.). These projects don't need middlemen or bosses to work. Smart contracts help keep things on track by following the right set of steps.

Smart contracts have some important qualities:

Do things on their own: Smart contracts know when to do tasks automatically if the right things happen.

Stay on a computer network: Many computers together store and protect smart contracts, just like a secure digital safe. This makes sure the contract can't be easily changed.

See-through and checkable: Since smart contracts are in a blockchain, everyone on the network can see what's in them. This openness helps people confirm the contract's terms and actions.

Trustworthy and safe: Once a smart contract is made and put into the blockchain, it can't be changed or messed with.

Lots of uses: Smart contracts work in many fields like logistics, real estate, and banking. They're great because they can do different jobs automatically and reliably.

The main elements of a smart contract

A smart contract is made up of three main parts that shape what it does. Let's check out each of these parts:

Signatories or Who's In: These are the people or groups that are part of the smart contract. They're the ones who agree to the deal. Instead of using pen and paper, they use digital signatures or special codes to show they're on board.

Subject of The Contract or What's the Deal: This is the big thing the contract is all about. It's the main reason for making the contract. This can be different depending on what the contract is for. Like in a smart real estate contract, it's the house being bought or sold. In a smart money contract, it's moving cryptocurrency to the buyer's digital wallet.

Terms and Conditions or The Rules: These are the specific rules everyone agrees to follow. They're like a how-to guide for the contract. Rules say what happens and when. It can include stuff like how much money, when things get handed over, how problems get solved, and any other things needed to make the contract work.

All these parts team up to make sure the contract is clear, does things on its own, and keeps everything safe.

How do smart contracts work?

Smart contracts have a special way of doing things that's both automatic and safe. Let's see how they do it:

Creating and Setting Up: Smart contracts are made by tech experts who write down the rules in code. Once the code is ready, the smart contract goes onto the blockchain network. It's like joining a club – it becomes part of the club's big list.

Starting the Deal: People who are part of the deal read and agree to the smart contract's rules. Instead of using paper, they put their agreement in digitally with a special signature.

Checking the Rules: Smart contracts have certain rules that must happen for things to work. The blockchain network double-checks these rules using real-time information or outside sources, like special messengers called oracles. For instance, if the rule is about getting money, the blockchain checks if the money is there.

Doing Stuff Automatically: When the rules are met, the smart contract does its thing without anyone pushing a button. It might move digital stuff around, update its records, or even make other things start happening.

Everyone Agrees: The blockchain network is run by lots of computers called nodes. They all agree if the smart contract did its job right.

It's a Wrap: After everything in the smart contract is done, the contract is finished. Everything that happened is saved forever on the blockchain – like writing in a big history book.

Types of smart contracts

Smart contracts come in different types, depending on different factors. Let's take a look at them:

1. Where They Work

Centralized. These contracts work with a boss-like center that watches over things.

Distributed. These contracts work without a central boss. They follow rules and do their own thing.

2. How Secret They Are

Confidential. These contracts keep secrets. Only the people in the deal can see what's inside.

Partially open. These contracts share some info but keep other parts private.

Fully open. These contracts are open books. Everybody in the group can see what's happening.

3. How They Start

Needs a Push: These contracts start when certain things happen.

Ready to Go: These contracts start on their own, no extra steps needed. They follow rules set from the start.

4. How Much They Do Automated

Super Smart: These contracts do everything by themselves on the blockchain. They don't need anyone to double-check.

Kinda Smart: These contracts work on the blockchain and sometimes with paper. They mix both worlds.

Examples of smart contracts

Smart contracts are getting popular everywhere, being used in various parts of life. This is because they bring many benefits. They help make things faster and smoother, and they cut down on extra costs by getting rid of middlemen.

Here are some areas where smart contracts are often used:

Video Games: Smart contracts are used in games to trade things like characters, weapons, and game money. They make sure who owns what and help with trades.

Law: In law, smart contracts help things go faster by making contracts work on their own. This makes signing deals easier.

Houses: In real estate, smart contracts make buying, selling, or renting property easier. They also make sure property changes happen safely.

Big Deliveries: Smart contracts help track big supply chains. This means following stuff from where it's made to where it's used. They also help with payments and warehouses.

Money Stuff: Smart contracts change how money works. They make lending between people easy, along with things like trading and farming.

Health: In health, smart contracts keep patient records safe and help with payments and insurance stuff.

DSF: Using smart contracts, our dApp securely allocates users' funds on Curve and Convex platforms, helping them earn yields from their cryptocurrency assets. The smart contract ensures that only the users themselves can access their funds. It allows freedom for deposits and withdrawals. Additionally, the contract serves another important purpose – it helps optimize transaction fees on the Ethereum network, making our tool even more convenient and profitable for users.

Smart contracts are like super helpers. They can do all sorts of tasks that used to take time and effort. They started with cryptocurrencies and cool virtual worlds, but now they're moving into regular parts of the world too.