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Blockchain smart contracts and their use, explained

Smart contracts are blockchain programs that are different from computer programs. Here’s how they work and why they’re important for Web3 applications.

Anyone who has spent time in cryptocurrency, block chainand Web3 ends up seeing the term “smart contract“, but many people do not know what this means. Confusingly, smart contracts have nothing to do with legal contracts, although they are inspired by them, and are fundamentally different from web applications and Although it is the most powerful technology to emerge from the blockchain, most people have never heard of it.

Smart contracts were first conceptualized by Nick Szabo in 1995 (who may or may not be Satoshi Nakamoto, the anonymous creator of Bitcoin), who came up with the idea of ​​”transaction protocolswhich automatically enforce the terms of a contract between two parties over the internet. This would have been very useful, as smart contracts could reduce or eliminate the risk of counterparties refusing to honor their end of contract, thus avoiding costly legal battles. Unfortunately, there is no way to do this without relying on a third party to host the contract, who could potentially alter or stop the code, rendering the idea useless. Also, unlike cryptocurrency, digital currency is non-programmable and inter-bank money transfers are inefficient and reversible.These limitations explain why smart contracts did not exist before the Ethereum blockchain went live 20 years later in 2015.


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Smart contracts are often described as regular contracts, but this is misleading and limiting. They are actually tiny programs running on a second-generation blockchain (i.e. Ethereum), where crypto wallets and other smart contracts can interact with them. Almost all cryptocurrencies and NFTs are standardized smart contracts that track token balances, allowing other smart contracts to act as intermediaries or vending machines, thereby eliminating counterparty risk when trading, transactions and distributions. Token contracts are essential to Web3, cryptocurrency, and blockchain-based metaverses because they create transferable digital property. Smart contracts can create utilities, like “airdrop“contracts that transfer tokens to multiple accounts simultaneously, or”multi sig“contracts that require multiple signatures to confirm an action. Smart contracts are widely used in decentralized finance (“Challenge“), a blockchain industry that replaces mainstream financial applications with smart contracts, and as of November 2021, DeFi contracts held nearly $100 billion in value (according to DeFi Pulse). Smart contract capabilities are extensive, with many more in development.

Smart contracts are very powerful, for better or for worse

Smart contracts manage money, NFTs and data

Smart contracts have many features. Websites and web applications can call smart contract functions, providing them with a simple interface. “Audience” are available to everyone, while sensitive functions can be restricted to authorized users/contracts. No one can modify or stop the functions of a smart contract, and crypto/NFT transfers are irreversible and only take a few seconds. They are also reliable, and will continue to operate during high-volume bottlenecks that otherwise block cryptocurrency exchanges. Smart contracts are self-sustaining”residentsof their blockchain ecosystem, requiring no maintenance or expense once deployed, and they cannot be destroyed or modified (with some exceptions).

Smart contracts have problems, as a smart contract”Bugs“represent billions of lost/stolen crypto over the past seven years. Because they cannot be changed, patching a smart contract works like a manufacturer recall, where a new/updated contract is deployed and users have to manually move their tokens.Therefore, smart contracts are developed as hardware rather than software, and professional security auditing and inspection services are often hired to find vulnerabilities before launch. smart contracts are limited to their native blockchain ecosystem and require the use of “bridges“to move assets to other blockchains, making blockchain bridges great targets for hackers. Finally, smart contracts are “blindto the real world, and must be fed data through special services, which can cause serious problems if the data is wrong (even momentarily).

Smart contracts are the most powerful blockchain technology, giving rise to cryptocurrencies, NFTs, DeFi, Web3 applications, blockchain games, decentralized metaverses and much more. These are the drivers driving blockchain adoption, given little credit until things go wrong. Although their potential is enormous, developers are not yet familiar with their quirks, because complex designs introduce more (expensive) problems and years of trial and error are required before block chain smart contracts will be ready for mass adoption.

Next: DAOs and why they are an important part of Blockchain

Source: DeFi Pulse

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