Part 1-A Guide to Smart Contracts
Most people would not readily enter into a contract with some of their friends and family members let alone a stranger that they don’t know or have never met. But the Internet opened new global markets where you could invest in a foreign startup, send money across the world, or purchase real estate in another country.
In such transactions, Trust is key, which is why many business transactions, both online or offline, require a third party (think of banks, estate agents, or escrow services). But third parties mean substantial settlement fees for services offered.
Fortunately, the advent of blockchain technology introduced the world to smart contracts, which solved the issue of trust among contracting parties. By formalizing business relationships conducted over the Internet (entirely P2P, Peer-to-Peer ), smart contracts removed the need for trusted intermediaries.
This first part of a two-part guide will help you understand what smart contracts are by discussing their history and how they operate. So keep reading.
What is a Smart Contract?
A smart contract refers to an agreement entered between two or more people, in a computer code form, that runs on a blockchain. It’s impossible to change without proper authorization.
All smart contract transactions are processed by the blockchain and can be sent automatically. But a transaction can only happen once the conditions set out in the agreement are met. Ergo, there is no need for a third party, as there are no trust issues.
Brief History of the Smart Contract
The concept of the smart contract was introduced in 1994 by Nick Szabo, who happened to be a legal scholar and also a cryptographer. Szabo noticed that a decentralized ledger that uses blockchain technology could be utilized for smart contracts.
In this format, it was possible to convert contracts into computer code that was stored and replicated on a computer system and supervised by a network that runs the blockchain. The system could also give ledger feedback such as money transfer and the receipt of a product or service.
Szabo deduced that the idea of a smart contract could potentially eliminate the need for a trusted third party (such as a bank) during transactions because a smart contract could activate automatically when certain conditions were met.
Unfortunately, blockchain technology was not available during Szabo’s time, so smart contracts were implemented almost two decades later.
How Smart Contracts Are Self-Enforcing Agreements
The blockchain is a revolutionary technology because it saves you time, money, and conflict by creating a decentralized P2P system that exists between permitted parties and makes intermediaries unnecessary. Yes, blockchains have their share of problems, but they are undeniably cheaper, faster, and more secure compared to traditional systems.
Smart contracts are embedded in computer code that is managed by a blockchain. The code contains the rules or conditions under which the contracting parties agree to in their interaction. The agreement is automatically enforced if and when the rules are met.
Smart contracts provide a conventionally accepted mechanism for the efficient management of access rights and tokenized assets between two or more contracting parties. The blockchain acts as a transparent shared ledger that protects all the information stored within from tampering, deletion, and revision.
The Bottom Line
Smart contracts help you exchange anything of value such as shares, property, or money in a transparent and conflict-free way without the services of a middleman. They provide a public and verifiable means to embed business logic and governance rules in computer code on a P2P network, and that can be enforced and audited by the majority consensus.
Look out for Part 2- A Guide to Smart Contracts.