Although the concept of smart contracts was introduced by Nick Szabo in 1994, it only became popular recently with the rise of cryptocurrencies and Web3. The Ethereum protocol is particularly suited for implementing smart contracts, with its blockchainBlockchain A public and immutable ledger of cryptographic transactions, organized in blocks. designed to be a more flexible virtual machine than Bitcoin for decentralized applications.
What is a Smart ContractSmart Contract A self-executing contract with the terms directly written into code on a blockchain.?
A smart contract is a computer program that operates on a blockchain. It is designed to automatically execute agreements or transactions when certain conditions are met. This is similar to the function of a traditional contract, but instead of being written on paper, it is coded and executed on a blockchain, for example.
How Does It Work?
The principle is simple: if certain predefined conditions are met, the smart contract activates and performs the programmed actions. For example, in a smart contract for a sports bet, if your team wins, the contract automatically triggers the payment of your winnings. This involves other aspects, such as providing the correct information to the smart contract (in this case, the correct sports result). This is where Oracles play a role in the ecosystem.
Advantages of Smart Contracts
- Automation and Efficiency: They reduce the need for intermediaries, speeding up processes and lowering costs. Additionally, many actions can be handled and executed since the entire chain is programmable and automatable.
- SecuritySecurity The measures and technologies used to protect blockchain networks and assets from theft, fraud, and attacks. and Transparency: Data in a smart contract is encrypted and stored on a blockchain, making it highly secure and transparent. Once implemented on the chain, the smart contract cannot be corrupted.
- Infallibility and Precision: Once deployed, they execute exactly as programmed, leaving no room for human error.
Disadvantages to Keep in Mind
- Security Risks: Like any program, they can contain vulnerabilities. If the code is not well-written, it may be susceptible to attacks. This means that even when ‘securely on the chain,’ it can still be subject to malicious attacks and manipulations.
- Rigidity: Once a smart contract is running, it is difficult to modify, even if errors or unforeseen issues arise.
Examples of Use
Smart contracts are used in various fields, such as:
- Decentralized Finance (DeFiDeFi DeFi services use smart contracts, decentralized protocols, and tokens to offer a range of financial services that can sometimes replace those offered by banks, such as lending/borrowing, asset management, insurance, or asset exchange.): To automate transactions and loans.
- Games and Digital Collectibles: For instance, in games where you can own and trade virtual items.
- Supply Chain Management: To track products from their origin to their final destination.
