Explainer

Smart Contracts: What Are They and What Are Their Benefits?

If you’ve been scratching your head wondering what smart contracts are exactly, you’ve come to the right place! Learn what smart contracts are, how they work, and what they bring to the table by reading our article.
Average read time:
5
minutes
Key Takeaways
  • Smart contracts are autonomous, decentralized, and transparent digital contracts.
  • They reduce, or even remove, the need for middlemen.
  • They run by following simple logic statements of “if this.. then that
  • They possess several benefits, such as security, speed, and trust.

What are Smart Contracts?

Smart contracts are blockchain programs that are executed when specified predetermined conditions are met. They are digital contracts that are autonomous, decentralized, and transparent. They are also virtually impossible to reverse or modify after deployment. 

As they run on a decentralized blockchain instead of being controlled by a central administrator, smart contracts are invulnerable to single points of failure. They also allow different parties to arrive at the same result accurately and quickly in a tamper-proof manner. Their reliance on codes defining the transaction mechanisms also results in reducing, even removing, the need for middlemen. Due to these reasons, smart contracts have been an integral part of blockchain development and a foundational part of decentralized applications (dApps).

Example of Smart Contacts

Smart contracts were first proposed in 1940 by an American computer scientist and legal scholar named Nick Szabo who compared them with vending machines.

For example, let’s say that a vending machine sells a can of soft drink for a dollar. When you input a dollar into the machine and choose a drink, it has to either provide you the drink, request you to make another choice (if the drink you chose has been sold out), or give you your money bank. This, in essence, is how a simple smart contract functions. As you can notice as well, the entire process of you providing your dollar and receiving a drink in return required no human interaction in between. As such, smart contracts can automate almost any kind of transaction without needing any middlemen.

How Smart Contracts Work

Smart contracts run by following simple statements of “if/when this happens, then execute that” which are written into code on a blockchain. When predetermined conditions have been met and confirmed, a network of computers runs the resulting actions like sending funds to the intended recipients. Once the transaction is complete, the blockchain is updated and the transaction can no longer be modified. 

A single smart contract can have several conditions, and a single application can have several smart contracts to support an interlinked set of processes. There are various smart contract languages for programming such as Solidity, Rust, and Vyper.

Benefits of Smart Contracts

Thanks to their features, smart contracts already possess several advantages over traditional arrangements. While the number of benefits are likely to increase as the technology improves and becomes more adopted, here are some of the top current benefits of smart contracts:

Security

Since smart contracts are run on decentralized blockchains, the transaction records are encrypted and hence, extremely difficult to hack. On top of that, the lack of an intermediary also removes any possibility of bribery or mechanism to tamper with the outcome.

Speed

As smart contracts are digital and executed automatically once the conditions have been met, there is no need to process contracts manually – saving a lot of time.

Trust

With smart contracts, there are no third parties involved. On top of that, their terms and conditions are accessible to all parties involved with no possibility of being disputed once the contracts are established. As such, they can be approached with full trust with no need to suspect any mishandling of information for personal gain.

One Last Thing…

Smart contracts are not just used for cryptocurrency payments, but also have a lot of real world use cases. For example, they can be used for voting in elections to reduce the risk of manipulation or in the music industry to better support emerging music artists by making royalty payments easier.

However, they also have a limitation: They cannot acquire information about real world events. The reason for this is because using external data could cause issues for consensus, which is crucial for security reasons as well as decentralization.

IMPORTANT INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the author and the comments, opinions and analyses are rendered as of the publication date and may change without notice. There is no guarantee that any forecasts or predictions made will come to pass. The information provided in this material is not intended as a complete analysis of all material facts or circumstances regarding any country, region or market. All investments involve risks, including possible loss of principal.

Risk management does not imply elimination of risks, and not all investments are suitable for all investors. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by MANTRA to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Data from third party sources has not independently verified, validated or audited. MANTRA accepts no liability whatsoever for any loss arising from use of this information; reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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