Smart Contract Quickly Explained
What is a Smart Contract?
The term smart contract was first used by a computer scientist and cryptographer, Nick Szabo in the 1990s, way earlier than the existence of Bitcoin. A smart contract works very similar to a normal contract, where two parties make an agreement to achieve what they promised. With the traditional contract conducted either in spoken or written form, usually with the presence of a third party to enforce the contract, a smart contract eliminates the need for a third party, by securing the contract inside a blockchain, which is completely distributed, makes it almost impossible to alter once the contract has been set.
Think of a smart contract as an if/else statement. Let’s say you buy a soda from a vending machine. The price of a soda is $3 and if you have $3, you can purchase the soda. More than $3 you will be given change and less than $3 will not get you the soda. Let’s scale that up. Imagine a crowdfunding platform such as Kickstarter. When a startup wants to raise money for their company, they can propose a target amount of money they plan to crowdfund. If the crowdfunding is successful, they will receive the money, else, the money will be returned to the investors. Smart contract eliminates the need for the middleman, in this case, Kickstarter. The benefit for a startup for using a smart contract is that they will be saving themselves 5% of total funding for the middleman (5% of total successful crowdfund is paid to Kickstarter). Besides, the elimination of middleman means that the total time spent on crowdfunding can be reduced as well by removing the need for paperwork for the third party. Most importantly, we can remove the need for trust when making this transaction, as a contract can be verified on the blockchain which anyone can access and not alter.
Application
Decentralised Finance (DeFi)
DeFi can be used for decentralised stable coin such as USDT where a cryptocurrency is pegged to the US currency, the dollar bill.
Supply Chain
Using a distributed platform such as a smart contract can improve transparency, and increase efficiency.
Crowdfunding
Like we discussed above, we can crowdfund by totally eliminating the need for a middleman.
Risk of Smart Contract
Though it is important to note that the contract is still written by people, a small mistake or a bug in the code may disrupt the whole system, making it vulnerable to attacks or even crash the system. Human error is of course the highest risk that still may occur in a smart contract.
