Updated: Jan 24
A smart contract is a program designed as an automated self-enforcing contract that executes when certain predetermined conditions are met. The general use case for these is to automate the execution of an agreement guaranteeing a specific outcome without any intermediary’s involvement or loss of time. Usually, within the cryptocurrency world, these are used as digital agreements that intermediate the exchange of digital assets between two parties. The terms of the agreement are set in the smart contract through specific lines of code, and the contract verifies its fulfilment before distributing the assets accordingly.
A practical example of this could be an online shop where once the payment has been received, the smart contract executes the function of shipping the products, making the whole process more efficient and less prone to errors.
Smart contracts were originally introduced in the 1990s, with cryptographer Nick Szabo coming up with the idea; but only later they were implemented in the context of cryptocurrencies on the Ethereum network, unlocking a long list of additional applications and functionalities. Currently, smart contracts play a big role within the Ethereum ecosystem, with several ERC-20 tokens having been created thanks to their application. Most of these tokens were launched during the wave of ICOs, or Initial Coin Offerings, that used smart contracts to enable a trustless and cost-effective exchange of funds during the token sales.
Ulterior use cases for smart contracts were to facilitate payment processing, enabling the creation of decentralized exchanges (DEX) and decentralized applications (DApps). With these smart contracts being programmable and suitable for many different use cases, companies started using them in a financial setting, creating decentralized applications (DeFi). Some use cases include clearing and settlement of trades, the payment of bond coupons, and the payout of insurance claims.
Moreover, other than in a financial setting, the versatility of their contracts makes them useful for nearly every industry where information needs to be transferred digitally between parties. For example in the equipment leasing industry, it could make the lease and execution of agreements easier and more efficient. Additionally, the healthcare sector could benefit from this technology, allowing for protection against data manipulation in clinical trials and enforcing intellectual property agreements used in the industry. Join us on Twitter and Discord to talk about crypto trading.