Smart contracts are core elements of decentralized finance (DeFi). They replace intermediaries in financial transactions, where transactions are executed once conditions are met. Smart contracts took decentralization to the next level since users can automatically perform the approved contracts with total transparency.
This article delves into smart contracts, their history, how they work, their advantages and disadvantages, and their use cases.
What are Smart Contracts?
Smart contracts are self-executing computer programs that live on a blockchain. They are made up of codes stipulating predetermined terms and conditions that, when met, activate specific outcomes. By operating on a distributed ledger, like a blockchain, smart contracts enable parties to reach an agreement accurately on schedule, while ensuring immutability.
Features of Smart Contracts
Self-Executing
Smart contracts minimize human intervention significantly since they are self-enforceable. Their logic-driven codes unlock value/access when the predetermined conditions are fulfilled.
Self-Verifying
Smart contracts can validate themselves when users follow the coded conditions. In the case of a breach, they can penalize the offender according to the rules. For instance, a smart contract can cancel a pending loan if the borrower fails to lock up their collateral within the predetermined timeline.
Immutable
One party cannot alter the agreed-upon terms of a contract, minimizing corruption and partisan advantage to one party. The only way of editing a smart contract is by adding an extra block to the current network with the mutual consent of all users.
History of Smart Contracts
Nick Szabo, an American computer expert, legal scholar, and cryptographer, was the first to introduce smart contracts in 1994. In his seminal essays, he offered a general definition of a smart contract as follows: “a computerized transaction protocol that executes the terms of a contract,” with broad objectives to “satisfy common contractual conditions, minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries.”
