An automated agreement between the contract creator and the recipient is an idea known as a smart contract. The agreement is written out in code format and stored in the blockchain system. When locked into the blockchain system, it cannot tamper with; therefore, the recipient can rest assured that the smart contract remains irreversible.
Smart contracts, popularized by Ethereum, the world’s second most popular blockchain, have led to many decentralized apps (DApps) and other use cases on the network.
History of smart contracts:
Smart contracts have long predated blockchain technology. The idea was founded in the 1990s by cryptographer Nick Szabo. Szabo had come up with a digital currency called Bit Gold that never officially launched. This type of bitcoin highlighted the smart contract case – people can do these transactions through the internet.
Many have seen these contracts to be similar to vending machines. They provide the user with the product without using a person. These contracts serve the same purpose but are known to be more versatile. Over time smart contracts have advanced. They have been created without coding skills since the platform’s creation. They’re improving security by utilizing other programming languages, developing alternatives such as hidden contracts, and devising ways to automatically record its history in a human-readable manner, which is far simpler to understand than using the blockchain.
How do smart contracts work?
Smart contracts can be compared to “if-then” statements between two parties. If one person’s needs are met, the agreement is settled, and the contract is considered official. They work just as well for bigger masses, such as government mandates and retail systems. Breaking down the idea of smart contracts, the first step is the agreement between the two parties. Once the two agree on the conditions, the smart contract is complete. The details are then recorded into the smart contract, encrypted, and stored in the blockchain network. Once the contract is completed and uploaded into the system, all the nodes will need to update the blockchain with this transaction. Therefore, updating the new “state” of the network.
What are the downsides?
While these contracts may seem like a great concept, it has their downsides just like anything. Firstly, we must consider that smart contracts and blockchain networks are done manually; therefore, there is room for human error. That’s not even bearing in mind the lack of regulatory certainty around these autonomous agreements. On paper, the notion of a safe, simplified money transfer procedure sounds excellent, but people should consider taxation and other aspects.
There is also a long-standing scaling problem. Because blockchain networks have struggled to expand since their creation, transactions might take minutes, if not hours, depending on traffic. While this may appear to be a concern at first, initiatives like Ethereum 2.0 are addressing it. Plus, a transaction that takes a few hours is still significantly faster than traditional fund transfers, which might take days.
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