If you have dabbled in the Web3.0 space or the general tech space in the recent past, you might have heard of the life-altering smart contracts. Smart contracts, also known as distributed apps, are popular these days. But what are they, and what problems do they solve?
The term ‘smart contracts’ was first used by Nick Szabo in 1997, long before Bitcoin was even in the picture. In layperson's terms, he wanted to use a distributed ledger to store a contract. Smart contracts are vital applications inside a blockchain that help in the transfer of anything, right from cryptocurrencies to goods transported around the world. They help remove intermediaries within a business contract and help streamline the entire process.
Essentially, smart contracts are decentralized automated applications that are self-executing and run on decentralized networks like blockchain. The software helps execute the transactions, which are irreversible and trackable.
Smart contracts create unanimous trust between two or more anonymous parties without factoring in a central authority or a legal system.
With the lack of administrative overheads, smart contracts are a significant driving force for connectivity, transparency, and efficient transactions.
What does a Smart Contract Do?
The means to the end are as simple and effective as smart contracts are meant to be. They help streamline complex transaction processes (such as acquiring a loan) and eliminate bloated intermediaries like financial institutions.
Blockchain comes into the picture and helps securely store the details of the various dealers of a transaction. This data can be used by lenders and take points on credit. With that in place, a smart contract can be created between all the stakeholders.
In the form of cryptocurrencies, the funds are released to the dealer, and the repayment process is set in motion as per the smart contract. The transaction is recorded on the blockchain and can be viewed at any time.
Types of Smart Contracts
These are legally enforceable and contain strict regulations within the smart contract. In addition, the contract holds information and resources for situations when the stakeholders involved do not comply with the norms of the contract.
Using smart contracts, processes involving transactions in spaces such as the financial markets and real estate, or any other space with strict regulatory oversight, can be simplified to a large extent.
- Decentralized Autonomous Organizations (DAOs)
Decentralized Autonomous Organizations, also known as DAOs, are defined as communities that exist in the blockchain. The community has well-defined rules as set by the smart contracts.
A participant’s activity is subject to the rules set, which are enforced when a particular recourse is encountered. For example, a participant within a DAO can take part in the community voting process if they hold a certain percent stake within the blockchain.
Most smart contracts have rules for the participants that work together and are enforced by other managing participants.
- Application Logic Contracts (ALCs)
Smart contracts with application-specific code work in tandem with other smart contracts that reside with the blockchain. They help in communicating with other devices that use similar ALCs. These are particularly helpful in the IoT domain, where multiple devices need to interact with one another.
To sum them up, ALCs are paramount in multi-function smart contracts that work in sync with each other when managing a program.
How Does A Smart Contract Function?
A smart contract is executed when a particular condition is met. For example, if Buterin wants to purchase a house from Satoshi, he would create an online agreement on a blockchain.
In this case, the smart contract might state, “When Buterin pays 300 ETH to Satoshi, then Buterin will receive ownership of Satoshi’s house.”
While this is explained in simple terms, creating a smart contract eliminates all the middlemen — lawyers, brokers, real estate agents, banks, and the government.
The fact that smart contracts are decentralized and trustless makes for impartiality that is the inherent nature of blockchain and smart contracts.
Smart contracts are not just used to form agreements between two people willing to buy or sell a house. In fact, the applications are near-limitless, with some of them extending into the insurance sector, health sector, the government, banking, and more.
Smart Contracts And ICOs
A popular use case of smart contracts is an Initial Coin Offering (ICO). An ICO is a crowdfunding system for new business ideas that uses smart contracts to create a token.
This token can help raise money for businesses by creating a conversion price and equating it to existing coins. Participating stakeholders can convert their existing token to the new token and provide an investment value to the business.
This token can later be used in the application when it’s built. The token price may also increase when the project becomes more popular, thus making the initial investors more money.
The concept of ICOs is similar to Kickstarter, with the fundamental difference being that it automates the whole crowd-sale process in a trustless and secure way.
Smart Contracts are also powering the next version of the internet, Web 3.0. They are becoming the standard backend for most multi-millionaire dApps and DAOs. Ethereum-based smart contracts are written in Solidity and Solana-based smart contracts in Rust.
Embrace the Future With Mutual Mobile
Smart contracts are set to play a valuable role in the Internet’s future with Web 3.0, and we are excited for both these emerging technologies to take the world by storm.
We at Mutual Mobile have been obsessed with emerging tech since our inception and continue to do so with the likes of the Metaverse, NFTs, and, yes, smart contracts.
If you are looking to enter this exciting domain, we are primed to be your best partners for success.