The term smart contract often gets tossed around when talking about the Ethereum blockchain and DeFi. This makes sense, since Ethereum is one of the most popular cryptocurrencies implementing this type of technology. Let’s break down what smart contracts are, how they operate, and how they contribute to the world of digital finance.
If you remember, we defined the Bitcoin network as operating on a cryptographic protocol. Smart contracts are a type of protocol that act upon certain agreed terms. They’re conditional — just like the statement, “if X, then Y.” Input leads to output.
In this way, smart contracts are pieces of computer code programmed to produce a predetermined outcome. They allow us to automate events, actions and results. It’s important to note that these transactions cannot be reversed or deleted — they’re immutable.
More simply, smart contracts can be defined as a trustless agreement or promise made digital.
Permissionless and Full of Potential
These contracts run on the blockchain, and a crucial component of this technology is that they can be sent without a third party — so no central authority needs to approve of the transaction.
Where banks and exchanges might typically authorize or mediate transactions, with smart contracts those institutions can be taken out of the equation. With the help of smart contracts, developers can build decentralized applications (dApps) that run peer-to-peer. This makes them typically inexpensive to operate and scalable, two ideal scenarios for growth and utility.
It’s also worth it to note that the permissionless nature of dApps allows them to operate outside of anyone’s control, meaning they’re resistant to censorship or restrictions.
It may sound pretty straightforward, and it sort of is…until we open up all of the possible use cases, caveats and consequences of said contracts. We then see how incredibly useful they can be — and also what would need to be done to ensure their effectiveness, safety and right application.
Where and How Smart Contracts Can Be Used
Many smart contracts run on the Ethereum network, as mentioned earlier, using the programming language Solidity. These if/then programs allow for “promises” to be executed on the blockchain — which could allow for exchanges of value and property without a third party. Since many nodes are witness to this transfer, both sides of the exchange could expect a seamless, and often faster, outcome.
Uses cases for Ethereum-run smart contracts include flash loans (where an asset is borrowed and paid back in a single exchange), token swapping (trading between currencies on decentralized platforms) as well as certain downloading permissions.
Other popular or potential areas where smart contracts may be used include real estate, financial services, the Internet of Things (IoT), and non-fungible tokens (NFTs). We have a piece all about NFTs coming up, so it may help to remember that smart contracts play a role in these much-loved digital assets.
Legal Applications, Supply Chains & Oracles
Let’s take a look at one potential use case slightly outside of crypto: wills. These legal statements outline what assets a person leaves behind, and because they have lawful implications, they’re subject to third party decision-making and judgment — and sometimes even crimes or mistakes. If they operated on smart contracts, several circles of people would be removed from the process as funds or assets would be transferred more automatically to the intended recipients.
You may be wondering how this entire process would function with as few people involved as possible. Likely, it would take a little while to get there. We’ve been accustomed to structure in our legal process that operates around a human-built system of ethics (ergo, law and order).
While it’s an ongoing advancement, there are newer tools and developments beyond this process that may bridge the daunting gap between people and smart contract protocols. Take oracles, for example, which intercept data for smart contracts from the outside. If the source is deemed as trusted, they permit this data to be fed to the smart contract.
There is some debate over whether oracles are the most trustworthy solution — and how they should be best used. Food supply chains are one example of this conversation in play. Wouldn’t we need a human factor to check the product at certain intervals in order to ensure safety of all types of food before reaching the dinner table? Many argue that some combination of oracles and human actors would be needed to complement or truly fulfill the work of smart contracts.
The Wrap-Up
These are only some of the many examples of smart contract utility that we could get into, and if you’d like to explore that path there’s so much online that can help. What’s your take on smart contracts — and can you think of any other interesting use cases for them? Sound off in the comments.
We’re looking forward to diving into the second half of this Ethereum series in the coming weeks. Thanks again for your involvement in the Womxn in Crypto community, and don’t forget to share this newsletter with someone you know who may like it!
Just catching up on my reading list, loving these letters and I’m learning a lot from you both. Thank you, One case that was obvious to me when I first started trying to understand blockchain tech was music. The potential to have music artists directly transact their music with their fan base, and cut out the huge share of profits that the legacy music business takes, it a massive opportunity.