Autonomy and Safety: How Smart Contracts Work

If you have yet to learn about the vast potential of smart contracts, it's time you pay attention!

By all accounts, smart contracts are the way of the future. If you are new to the cryptocurrency and Blockchain Industry, it would be wise to understand the process that underlies it all: smart contracts.

Check out this guide on everything you need to know about smart contracts.

A Guide to Smart Contracts

So what is a smart contract? When you think of the word "smart" anything, what usually comes to mind? Often, when something is smart, it means that there is a built-in intelligence.

In other words, smart things can run on their own to a greater degree. They require less of your intervention and maintenance.

By this definition, smart contracts are, indeed, smart. In a nutshell, smart contracts are pieces of computer code that streamline transactions online.

Operating under the commands of defined rules and penalties of agreement, smart contracts allow a transaction to proceed only if those parameters are met.

For example, if Joe wants to buy a car from Jane, they agree that the price will be $5000. Only when Jane moves the agreed-upon amount into Joe's account will ownership of the car pass to Joe.

The way smart contracts can achieve this is by operating under an "if/then" protocol. Only if the transaction rules are met will the currency then be deposited into the buyer's account.

Once the transaction occurs, smart contracts guarantee its permanence; it can never be undone. The transaction is automated, so there's virtually no room for last-minute term changes or some such hoodwinkers!

Cryptocurrency's Smart Contract Foundation

And if you're wondering what type of currency goes hand-in-hand with smart contracts? You guessed it, cryptocurrency!

In many ways, smart contracts are the foundation of cryptocurrency and the ledger system that undergirds blockchain technology. The development of smart contracts even pre-dates the rise of Bitcoin by at least a decade!

The inception of smart contracts came in 1994 from the mind of an American computer scientist, Nick Szabo. Szabo visualized a digital version of the merchant point-of-sale (POS) system.

On its face, a virtual POS system seems simple enough: you give the money, you get the product. But what Szabo envisioned was more than simple digital transactions, which were already gaining popularity.

What Szabo imagined was the complete absence of a middleman. In a word, decentralization.

Whether you're buying a CD from Columbia House (this was 1994, after all) or closing on a house, there's always a middleman taking a piece of the pie, however large or small.

Sometimes that piece is huge! Whether it's real estate, contract settlements, or global payments, fees have become a mainstay in virtually every type of transaction.

Unless–that is–you're paying in cash. When you buy a couch on Craigslist, do you need a go-between? Probably not.

In fact, when you're paying cash for anything, you don't need a middleman. You don't need banks or any other institution telling you how or when you can use it. That's part of the beauty and ease of cash.

And, seeing as how there was no digital "cash" to sling freely, Szabo needed to invent it. Such a virtual currency would need to stand on its own – it could not be some form of existing currency, eventually tied to and regulated by the banks.

So Szabo created a little something called "BitGold." If you're thinking what you're probably thinking, you're absolutely right. Bitgold was the precursor to Bitcoin.

The Integrity of the Ledger System

Like all blockchain transactions, smart contracts follow protocols that virtually guarantee their integrity. Many use the "vending machine" analogy to describe how smart contracts are safe.

Vending machines are safe because they're automated: you put in money and get your product without anybody there to argue with you about the terms. Smart contract protocols dictate the terms. All you have to do is follow them and the transaction flows smoothly.

Another layer of security inherent in smart contracts has to do with the ledger system. Each transaction must be verified and witnessed by several other users – sometimes hundreds of other witnesses.

If the transaction's stipulations aren't followed, then the transaction doesn't happen, both via the protocols and the witnesses who refuse to validate it.

Some of the benefits of such a system include greater trust, autonomy, efficiency, safety, and savings. It's no wonder why Bitcoin smart contracts have only grown in popularity.

Possible Uses of Smart Contracts

Szabo and the legendary and anonymous Bitcoin inventor Satoshi Nakamoto visualized the smart contract's use in all types of transactions. According to Szabo himself, in a forward to a report to the Digital Chamber of Commerce:

"The smart contract goes beyond enterprise business solutions – in fact, my personal favorite and most exciting type of smart contract is constructed in peer-to-peer environments, from simple natural language by individuals to operate between individuals."

The report outlines twelve use cases for smart contracts, including:

  • Trade Finance
  • Derivatives
  • Auto Insurance
  • Supply Chain
  • Mortgages
  • Securities
  • Digital Identity
  • Cancer Research
  • Financial Data Recording

Even without the notion of "buying stuff" through a currency, the smart contract principles carry promise for various industries. When you consider how bogged down many transactions become due to bureaucracy, it's no wonder smart contracts have so many people wide-eyed at the potential for greater efficiency.

Wrap Up

Ask any blockchain enthusiast, and it's not just about saving money. Yes, fees are cumbersome at the very least. At their worst, fees prohibit transactions.

What the hardcore blockchain devotees tout is the system's ability to work around regulation. It's not just the fees; it's the rules. It's having to answer to someone for something that, at its core, may not concern them in any meaningful way.

Other than you're using their house in which to do business. A blockchain supporter would say, "why not build another house?"

In fact, why not build several other houses? Decentralizing systems, one-by-one, might be the future smart contracts have sparked.

Interested in learning more? Read more valuable articles about blockchain, Bitcoin, smart contracts, and more on our blog.