KEYTAKEAWAYS
- Smart contracts are self-executing digital agreements stored on blockchain networks, automatically performing actions when specific conditions are met, eliminating the need for intermediaries.
- Unlike traditional applications, smart contracts run on decentralized blockchain platforms, offering enhanced security, transparency, and trustless operation across various industries.
- From real estate transactions to digital identity management, smart contracts enable automated, secure, and efficient processes that reduce costs and human error.
- KEY TAKEAWAYS
- YOUR ROADMAP TO UNDERSTANDING SMART CONTRACTS
- WHY DO WE NEED SMART CONTRACTS
- UNDERSTANDING SMART CONTRACTS: THE BUILDING BLOCKS
- 3 WAYS SMART CONTRACTS ARE CHANGING BUSINESS
- REAL-WORLD APPLICATIONS: SMART CONTRACTS IN ACTION
- THE FUTURE OF SMART CONTRACTS: WHAT’S NEXT?
- DISCLAIMER
- WRITER’S INTRO
CONTENT
Blockchains that support smart contracts are called Smart Contract Platforms. Some prominent examples include Ethereum, Sui, TON, and others. Each platform offers unique features and capabilities for deploying and executing smart contracts.
YOUR ROADMAP TO UNDERSTANDING SMART CONTRACTS
- Introduction to Smart Contracts
- Smart Contracts (DApps vs Traditional Applications)
- Working Mechanism
- Blockchain Platforms Supporting Smart Contracts
- Types of Smart Contracts
- Use Cases
- Conclusion
WHY DO WE NEED SMART CONTRACTS
Blockchain technology allows for transaction verification in a fully trustless environment, utilizing an open, distributed ledger (database) for data management. The Bitcoin network is one such example of a public blockchain where we see transactions on a daily basis.
However, the native blockchain code logic may not offer the flexibility to execute and authenticate transactions to suit certain use cases or conditions desired by application developers. For example: Crediting the interest amount to a user’s account annually once the interest has compounded.
To better utilize the benefits of blockchain, smart contracts were added as a feature, where developers could add customized logic in addition to blockchain functionality to suit their use case.
Let’s explore this in detail:
UNDERSTANDING SMART CONTRACTS: THE BUILDING BLOCKS
Smart contracts are pieces of code stored on the blockchain that provide added composability and usability.
Smart contracts contain logical programming similar to what we see in Web2 applications.
Let’s understand smart contracts by comparing them to Web2 applications.
1. Difference between Smart Contracts (Web3) and Traditional Web Applications (Web2)
Traditional Web applications (Web2) software programs are hosted on centralized servers and accessed over the internet, with access controlled by the application owners.
These programs are built using various programming languages, such as Java, .NET, PHP, Swift, and Python, and are often tailored for specific industries or business needs.
Examples include banking apps, content management systems (e.g., WordPress), e-commerce platforms, and OTT services. Users interact with these applications via a web browser or dedicated client.
Smart contracts, commonly used in decentralized applications (DApps) or Web3, are code segments integrated into blockchain systems. These contracts are typically written in programming languages such as Solidity, Rust, Move, or Vyper.
Source: ResearchGate
Once deployed on the blockchain via virtual machines running on blockchain nodes, smart contracts are assigned a unique address, similar to blockchain wallets. DApps and other applications can interact with these contracts by referencing their address to execute the code, whether on a public or private network.
2. How do Smart Contracts Work?
A smart contract is a digital agreement encoded on the blockchain, with conditions and permissions written in code. It requires specific events to occur in sequence to activate the terms. Smart contracts may also have time-based conditions and are accessible via a unique blockchain address. They operate on simple logic, such as:
- IF you transfer asset 1, THEN you receive cryptocurrency.
- IF you transfer digital assets (e.g., ETH, BTC), THEN you receive asset 1.
- IF I complete the work, THEN the agreed digital assets are sent to me.
Once broadcasted, the contract is executable and verifiable on the blockchain network.
3. Blockchains that Support Smart Contracts
The blockchain ecosystem features several platforms that enable smart contract deployment and execution. Here are some notable examples:
Ethereum: One of the first Layer-1 blockchains to enable smart contracts, Ethereum has rapidly emerged as a foundational pillar of the Web3 ecosystem. It has cultivated a dynamic space for decentralized applications (DApps) and innovation among developers.
Smart contracts on Ethereum are written in Solidity and executed by Ethereum Virtual Machines (EVM) across the network’s nodes, with validators being compensated through gas fees.
Sui: One of the latest additions to Layer-1 blockchains, Sui has set a new standard for blockchain performance. The Sui team has invented a new smart contract language called Move, that prides itself on simplicity, an object-oriented model of addressing blockchain assets, and enhanced security.
Hyperledger Fabric: This platform enables the creation of private, permissioned blockchains. Unlike public blockchains like Ethereum or SUI, these blockchains operate on a consensus mechanism where only authorized validators—who have the necessary permissions—are able to validate transactions.
This setup makes it an ideal platform for building purpose-driven smart contracts tailored to specific, targeted use cases. Example: A private blockchain among all the Pharma industries to keep track of fake medicines.
Other blockchains that support smart contracts include Binance Smart Chain (BNC), Solana, Cardano, Avalanche, TON, TRON, and Cosmos.
3 WAYS SMART CONTRACTS ARE CHANGING BUSINESS
1. Smart Legal Contracts
As the name implies, these are digital versions of traditional legal agreements. They typically include legal terms that outline the causes and outcomes of various situations, which are mutually agreed upon by the parties involved. The parties involved authorize and authenticate themselves using digital signatures.
These contracts can be used on the blockchain in use cases like real estate, transfer of ownership, financial transactions, and so on.
2. DAO (Decentralized Autonomous Organization)
A DAO is a blockchain and smart contract based entity with a shared goal. DAOs do not have a centralized monitoring authority, but rather define a governance system using smart contracts. The principle here being “Code is law.”
All activities in a DAO are governed by rules aforementioned in the smart contracts, much like rules mentioned in democratic constitutions. The users are granted voting rights to maintain democratic decorum.
Examples:
- Uniswap is a decentralized exchange and AMM (Automated Market Maker) that works on the principle of a DAO
- The DAO on Ethereum
3. Application Logic Contracts (ALC)
ALCs are code-based protocols that typically stay synchronized with other blockchain contracts. They follow logical principles like traditional Web2 applications.
They facilitate interactions between devices, such as those on the Internet of Things (IoT) or with other blockchain systems. Unlike traditional smart contracts, which are signed between individuals or organizations, ALCs are executed between machines and other contracts.
REAL-WORLD APPLICATIONS: SMART CONTRACTS IN ACTION
Smart contracts have several applications:
Agreements: In scenarios where two or more parties wanting to conduct business or exchange products or services must concur on the arrangement’s terms and conditions. Smart contracts can help bring transparency and clarity to the criteria for such agreements.
DeFi Applications: As mentioned earlier, Uniswap is a decentralized exchange (DeFi) that relies heavily on smart contracts to facilitate its services. These smart contracts fully automate functions like swaps, liquidity provision, and transfers within DeFi applications.
Digital Identity Cards: Blockchains provide a trustless environment that ensures a high level of personal identity ownership, as each user controls their own private key.
Smart contracts can be utilized to issue digital ID cards, enabling users to authenticate themselves without disclosing personal information on the blockchain.
These ID cards can be issued by governments on a public blockchain, with the process remaining transparent through the use of smart contracts.
Real Estate: Smart contracts can speed up the transfer of property ownership by automatically creating and executing agreements. For example, after the buyer makes a payment to the seller, the smart contract can instantly transfer control of the asset based on the payment record on the blockchain.
THE FUTURE OF SMART CONTRACTS: WHAT’S NEXT?
Smart contracts offer secure, transparent, and automated solutions that eliminate intermediaries and reduce human error. As blockchain technology evolves, smart contracts will continue to reshape industries and drive the future of decentralized systems.
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