Although the terms Bitcoin, blockchain and smart contracts have created a buzz in the crypto space, only a handful of people are aware of the technology, how it works and how it can be used to churn profits.

“Smart Contract” is a popular word, but is shrouded in confusion and for many, it is a little difficult to understand, too. A Smart Contract imposes a relationship with cryptographic code. So, they execute precisely the way their creators tell them to.

The Origin

The idea of Smart Contracts was initially given by Nick Szabo, famous cryptographer and computer scientist, in the year 1993. The idea was to provide a kind of digital vending machine so that users can input data or value and accept a limited item from the device.

Ethereum platform is specifically built for creating a Smart Contract. So if an Ethereum user sends 5 Ether to someone on a particular date using the Smart Contract, it would execute the desired command. The best part is that these new tools are the building blocks for decentralised applications and are a blessing for decentralised autonomous companies.

How does Smart Contract Work?

Bitcoin was the first to support basic smart contracts, but it was limited to currency use case. Ethereum brought a language that allowed developers to write their programs and create their Smart Contracts. Ethereum white paper calls it autonomous agents, which supports a broader set of computational instructions.

Features of Ethereum Smart Contract:

  • Manage agreements among users.
  • It has a multi-signature eco-system, which allows transferring funds only when a certain percentage of people agree to it.
  • Stores information like membership records and domain registration information.     
  • Like a software library, it provides utility to other contracts, as well.

In short, this is how smart contract works:

  • In the first step, an agreement between two parties is written in the form of code in the blockchain. The deal works as a public ledger, but the individuals involved in the contract may be anonymous.
  • In the second step, expiry date or strike price is hit, which works as a triggering event, and the contract executes itself as it was coded by the developer.   
  • In the third step, the regulators can understand the whole process in the market, using the blockchain and at the same time, maintain the privacy of the individuals.

The good part is that Smart Contracts can be used all across the globe by anyone in the chain, from financial institutions to healthcare or insurance sector. Smart contracts are immutable, once created no one can change it.

Blockchains where you can process Smart Contracts

Bitcoin: This is an excellent tool for processing Bitcoin transactions, but possesses the restricted capacity for document processing.
NXT: This public blockchain platform contains limited templates for Smart Contracts, which means you cannot code anything on your own and need to utilise what is given.
Side Chains: This is another form of blockchain that runs head-to-head with Bitcoin and offers more opportunities for processing contracts.
Ethereum: This public blockchain platform is an advanced option for coding and processing Smart Contracts. If you pay for computing power using ETH tokens, you can code anything you wish.

As far as the potential of Smart Contracts is concerned, multiple industries can get benefited with it, ranging from real estate to automobiles and even law firms.


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