Beginner Series: What Are Smart Contracts?

In the second article of the Beginner Series, we’re going to discuss smart contracts. If you’ve spent any time in crypto, you’ve likely heard the term “smart contracts” a lot. But what are smart contracts and why are they so important? Let’s dig in.

What is a smart contract?

Smart contracts were first described by cryptographer Nick Szabo way back in 1994. He envisioned a world where agreements could be executed in a trusted manner without third party mediators.

But Nick was a bit too early. In order for smart contracts to really work in a trusted manner, blockchain technology was needed. And while bitcoin was the first blockchain to rise to fame, it was the introduction of Ethereum 20 years later (since the Nick Szabo paper) that popularized the concept of smart contracts. Because Ethereum blockchain was designed to be a smart contract platform for developers to build applications on.

The concept of a smart contract is actually pretty simple. A smart contract is a self-executing computer code where agreed terms (between the parties) are written into a code. If the agreed conditions are met, the agreement is automatically executed.

Let’s take Clip Finance as an example. Once you deposit stablecoin of your choice into the Clip protocol, the smart contract automatically executes the yield farming strategy programmed into the protocol. There’s no human intervention involved in handling your deposit.

Or, let’s take a different, perhaps more familiar example. Let’s say you’re travelling to Portugal, and the landlord has a lock system that’s governed by the smart contract. Once the deposit for the apartment rental is deposited into the smart contract, the smart contract automatically exchanges the deposit against the security code on a specific date and thus sends the security code to the tenant. If the deposit isn’t paid, the code isn’t sent. Or, if the deposit is paid, and the code is not sent, the smart contract automatically refunds the paid amount back to you. All done without any third party.

The whole decentralized finance world and the NFT space are built with smart contracts. There are many different blockchains (smart contract platforms) now, that are being used to develop new decentralised apps. And we’re still at the very beginning of exploring what we can do with smart contracts.

To conclude, here’s what you need to know:

• Smart contracts are agreements written into a computer code, where conditions are automatically verified and executed.
• Smart contracts were first mentioned by American cryptographer Nick Szabo in 1994.
• Smart contracts are enabling us to build a new and better financial system (and a lot more, like supply chains, registries, commerce, etc).
• Transactions on blockchains (using smart contracts) are transparent, irreversible, and traceable.
• We’re only at the beginning of understanding the possibilities smart contracts enable.
• Smart contracts enable us to transact with each other in a trusted way without third parties.

This was a brief overview and introduction to smart contracts. In the next Beginner Series, we’re going to learn about web3 wallets.