Smart contracts are computer programs stored on blockchains that are designed to carry out the terms of a contract using cryptocurrency as collateral. Smart contracts are often referred to as self-executing contracts or digital contracts because they do not require human intervention to complete the terms of the contract when certain conditions are met.

You can imagine a smart contract as a vending machine that automatically executes a transaction automatically. For example, let’s say Alice wants to sell Bob a collectible coin worth $200 and Alice is confident that the coin is authentic and in mint condition. Alice could write code for the smart contract to escrow the coin until Bob and herself both approve a transaction for them to be sent to the address specified in the smart contract. This lets Alice and Bob know that they have control over their funds at all times and that neither party can cheat the other. It’s important to note that smart contracts are self-executing; once Alice has written the code for the smart contract and sent it to Bob, the contract will execute itself when it’s time to send the coins to Bob.

Smart contracts are programmed with “if/then” logic that automates transactions and contracts between parties who don’t know each other or trust each other. For this reason, smart contracts have huge potential to revolutionize the way we create agreements between strangers or between people and companies.

How do smart contracts work?

Smart contracts are written in a variety of programming languages (including Solidity, Web Assembly, and Michelson).

On the Ethereum network, a smart contract’s code is stored on the blockchain for transparency purposes. Anyone with internet access can inspect and verify the smart contract’s functionality by viewing its code and current state.

Nodes in the network execute a smart contract’s code to reach a consensus about the outcome and resulting flow of value. This is what allows smart contracts to securely run without a central authority, even when users are making complex financial transactions with unknown entities. For example, a smart contract could be used by a small business owner who needs to pay an independent contractor for services at the end of the month but can’t do so until the work is completed. Rather than having the business hold on to the money until the work is completed, a smart contract could automatically release the funds once it’s verified that work was done according to the contract.

Executing smart contracts on the Ethereum network requires transaction fees called “gas”, which must be paid before the contract is executed in its entirety.

Once deployed onto a blockchain, smart contracts generally can’t be changed, even by their creator. This means they can’t be censored or shut down.

History of smart contracts

The history of smart contracts dates back to the late 1980s and early 1990s, when computer scientists began working on prototypes of smart contracts. These early programs were developed to handle simple agreements between two or more individuals or organizations. However, they were largely untested and unproven because they lacked security mechanisms and were difficult to verify and execute.

Vitalik Buterin first proposed the idea of smart contracts in 2013 with a white paper describing a cryptocurrency called Ethereum. Ethereum launched in July 2015 and quickly became the most well-known platform for developing and using smart contracts.

What are Smart Contracts Currently Being Used For?

Insurance Companies

Many insurance companies are using smart contracts to increase the accuracy of their claims process and reduce fraud. For example, some companies are using smart contracts to track and validate vehicle damage claims so that claims can be paid quickly and correctly.

Health Systems

Smart contracts are currently being used by health systems to facilitate secure patient-doctor communication, recording and safely transferring data. This means that This way, the patients are in control of their own data. If researchers or pharmaceutical companies want to use patient data, they must purchase it, and the patient has to choose whether or not they want to sell it to them.

Governments

Governments can make voting systems completely trustless and much more secure by using smart contracts. When the voting transaction is written to the blockchain, it cannot be altered, making it impossible to commit fraud. When the voting is over, the smart contract will send a token to the winner in a matter of seconds. This has the potential to make elections faster, more secure, and most importantly, indisputable. Since all the votes are written in the blockchain, they are verifiable.

The Future of Smart Contracts

As smart contracts become more common, they are expected to revolutionize the business world by allowing anyone to create legally binding agreements without lawyers or judges. As a result, smart contracts are poised to become one of the most significant developments in technology in the 21st century. This has the potential to revolutionize whole industries from finance to real estate to media to healthcare and beyond.

However, the technology is far from perfect and it still has a long way to go before it reaches its full potential. Some problems are technical in nature while others are related to user adoption and regulation.