Crypto 101: Pulling the Curtain on Smart Contracts
If you’ve been in crypto for some time, you’ve heard the term “smart contracts” at least a few times. Smart contracts this, smart contracts that - it can quickly become overwhelming. That’s why in this article, we will give you a proper introduction.
You’ll learn:
- The definition of smart contracts.
- How they work.
- The benefits of using smart contracts.
Also, you’ll see a few examples of these contracts that will show you the different use cases.
Let’s take you for a ride in crypto land.
What’s the definition of smart contracts?
Smart contracts are self-executing contracts written in code. The code defines the terms within the contract. In most cases, smart contracts are built on a decentralized network like Ethereum. That’s because a decentralized network ensures that both parties get what’s agreed to once the pre-defined conditions are met.
Smart contracts are traceable and irreversible - once executed, the contract becomes a permanent element on the blockchain.
How do smart contracts work?
They follow the “If/when X happens, then Y” structure. The most down-to-earth example of smart contracts is the vending machine. When you put money into the machine, you get your drink.
Just like the vending machine, smart contracts are completely automatic - when the conditions are met, a computer executes them.
What are the benefits of using smart contracts?
If you’ve spent more than 5 minutes in the bank, you know the amount of paperwork you have to deal with. Smart contracts can remove all of that, saving you time, money and effort. That’s because they are 100% digital and automated, so you won’t have to waste hours waiting around at the bank.
Using smart contracts in a deal allows for full transparency because they are built on the blockchain. The blockchain increases the security of these contracts because it’s encrypted, so it’s hard to hack. On top of that, each transaction is connected to the previous transactions on the blockchain, so if hackers want to break into a smart contract, they will have to access the entire chain.
Take that, hackers!
One of the biggest benefits of smart contracts is the removal of the middleman of most transactions - it makes them faster and cheaper.
What are a few examples of working smart contracts?
The most familiar example of working smart contracts to crypto enthusiasts are NFTs. “How are NFTs related to smart contracts?” That’s easy. Every time you buy an NFT, you sign a smart contract with your wallet that shows you paid a certain amount of money to purchase the token.
Another thing that uses smart contracts is a decentralized autonomous organization (DAO). The entire organization runs on these contracts - they determine its structure, ownership and the compensations each participant gets.
Most of the DeFi dApps are built with smart contracts. dApps use these contracts to ensure each transaction is completely legitimate and transparent. Smart contracts make moving funds on DeFi so much easier and faster than moving your money from one bank to another.
We hope this article made it easier for you to understand what smart contracts are all about. If you want to increase your crypto know-how, check out our crypto 101 series to learn things like:
See you down the crypto rabbit hole.
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