What is a Smart Contract? A Beginner's Guide

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In 1994 Nick Szabo invented a term called “smart contract” as a means of creating a contract based on mathematical computations.

What Szabo intended was to create a legal contract, but programmed.

This would lead to execution by a computer, not a person, making the computer execute the contracts agreement when the terms are met.

By creating a contract executed not by a person, they are termed smart contracts, as they conduct the agreement without input.

This is one of the reasons that most of these decentralized infrastructures can run decentralized.

This is also what is contained within a blockchain.

Let’s go over the different characteristics of smart contracts to understand it better.

Smart Contracts Are Made of Decentralized Code

While a regular legal contract or agreement is written and overseen by a central entity, smart contracts are not.

Let's take Bitcoin for instance...

With Bitcoin, you have nodes around the world.

Each of these nodes downloads and stores the blockchain, they also contain the smart contracts within them.

This code is enforced without a person on all Bitcoin nodes.

Meaning it is decentralized code, scattered across the world, and enforced evenly.

That means with smart contracts, people can move currency or resources across long distances in a decentralized manner.

Smart Contracts Use Mathematical Code

Logic is a math-based principle.

And while many people don’t realize it, a legal contract is a bunch of conditional statements.

This can resort to math.

If 1+1 = 2 then turn the program on.

If 1+1 = 4 then don’t turn the program on.

Now dealing with a finite amount of assets or cryptocurrencies there is a lot of math that goes into it.

This prevents double-spend and many other problems solved by modern cryptocurrency.

Smart Contracts Are Computer Code

This makes it a bit more complex than writing out a legal document.

It is also the reason that they are both more complex, and less complex than a legal document.

Instead of deciding on the terminology of words, and what-ifs, the code is set.

Most code is open-source so that it can be edited in a sense, but not to the degree of changing the whole document or meaning of the existing contract.

Smart Contracts Set and Safeguard Conditional Agreements

Now, this can be complex or very simple.

One can create a conditional smart contract agreement that says:

“If X sends # money, then Y receives it, and X doesn’t have it anymore.”

Or

“If X gets service then for every period X receives said service from Y, Y is continuously streamed $, once Y is finished performing the service, X stops providing payment.”

Now that again isn’t that complex of an agreement but it simplifies the thought process behind these conditional agreements.

Like anything, contracts contain a lot of what ifs and buts.

Now we can program a system to keep the sanctity of a contract.

Without manipulation or oversight.

Smart Contracts Can Become A Form Of Law

Now before we proceed with that, realize that they currently aren’t the law.

They are a form of Law.

But not the mighty law that helps and hurts us.

Although, in the future, they may become law.

Here’s one example:

Your smart car drives itself but never moves over the speed limit because its smart contract to the legal department says that the road it is on requires a certain speed limit and nothing more.

Again, just an example but a way in which smart contracts could be law.

One point to make is that smart contracts exist on certain blockchains.

That means a smart contract on ethereum doesn’t necessarily exist on the Bitcoin blockchain, and so on.

Leading to the next point.

Smart Contracts Are Stored on Blockchains

Being a contractual computer code based contract, they need to exist somewhere.

In the case of smart contracts, it is on a specific blockchain.

Each coin has their smart contracts and has certain ability to program and create different smart contracts.

Some are limiting in nature, and some have no limit.

The list goes on and on when it comes to smart contracts.

Smart Contracts Can Deal With and Deliver Physical Goods

Now, this may seem strange, but let's walk first through a purchase of a product at Amazon.

You press “one-click checkout.”

Within two days do you magically get a package with your item?

No, after pressing the button there is a series of commands that take place. The fulfillment center takes notice, packages the product, sends it to your house.

The UPS man runs up to your door and boom the package is there.

Now with a smart contract, the same thing can be programmed and built into the executable code.

It would become computer code, based on mathematics and is guaranteed to execute.

That means that there isn’t the fear of not ordering something or misplacing the order or any other mishaps that could happen.

Instead, the moment the smart contract is executed so will the prevailing conditions be met.

The Summary of A Smart Contract

Smart contracts are the foundation of many Cryptocurrencies.

It solidifies code and allows a trustless society within true blockchain technology.

What is a Smart Contract:

  • Decentralized, Mathematical, Computer Code
  • Conditional Agreements
  • Guaranteed To Execute
  • A Form of Law
  • Stored On Blockchains
  • The Beginning of A Set of Actions

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