What Are Smart Contracts? [For Beginner]

Cryptocurrency ecosystem has been dubbed as the next “Web 3.0”. The next big innovation has been dubbed to come from cryptocurrency because of the technology called “smart contracts”.

Learn more on what is smart contracts and how it revolutionize the cryptocurrency ecosystem far beyond what we can imagine.

In the advent of blockchain tech, there has been a lot of innovation in extending the power of decentralization and P2P network beyond just a currency. One of the biggest innovations is smart contract, a digital self executing contract that runs on the blockchain network.

What Is Smart Contract?

In essence, smart contract is a lines of code that can be executed using blockchain to create a trustless and transparent system. Smart contracts are made up of lines of code using a programming language called Solidity, which will be executed on EVM (Ethereum Virtual Machine)

After the cryptocurrencies craze swoop across the world, a new idea emerges in reaching the full potentials of blockchain. We understand that money is just a social contract that is agreed upon by the governments, banks,and other financial institutions. 

The starting of bitcoin has disrupted our definition of what money is and opens up a new world of exploring other social contracts that can be empowered through this tech. The idea was what if we give the tools that allow people to create their own social contracts with the existing blockchain infrastructures instead of trying to build a new blockchain system for every other social contract. 

How Smart Contract Is Used

Vitalik Buterin took the idea of smart contracts and developed a new blockchain called Ethereum ($ETH), second most valuable cryptocurrency in the world. Here he introduced smart contracts, as self executing code based contracts on top of the Ethereum blockchain. 

Smart contracts are made up of lines of code using a programming language called Solidity, which have pretty much the same syntax as Javascript, which will be executed on EVM (Ethereum Virtual Machine), it is the environment in which all Ethereum accounts and smart contracts live.

The basic analogy can be imagined in simple ways. Imagine a vending machine, the vending machine only allows certains actions for the users, which is accepting coins and the funds must be equal or more than the price of the items available in the vending machine. Only then the vending machine will execute the next tasks, which is allowing the users to choose any item they want and give them the item alongside with the necessary change. The vending machine here would be the smart contract. It works independently without any help or interference from any party. 

You may be wondering, every computer can do that. That is true but smart contracts are executed in the blockchain network or to be more precise, Ethereum Virtual Machine (EVM).

Ethereum Virtual Machine creates a layer of abstraction or environment that executes the smart contracts. EVM distributes the copies of smart contracts to all of the nodes (computers that joined the network). When the contracts are called, the nodes run the code and give the result and update the state of the blockchain.

Once deployed, it will stay in the network forever and execute the code whenever it is being called. This made the contract created to be trustless (no need to put trust as you can trust it will execute the code accordingly without any interference) and fully or semi automated transactions (depends on how the smart contracts are written).

Smart contracts is the gateway for applications to be built on top of blockchain as it allows the integration of front ends to blockchain networks. Developers can create a front end platform that will call the deployed smart contracts and mediate the relationships between the real world users and their funds and social contracts in blockchain. 

The flexibility of smart contracts also made it possible for people to create smart contracts to call other smart contracts. Financial tools can be built on the relations of other financial tools which creates a new concept that we call composability or money legos. This creates an even more exotic financial instrument that does not exist in traditional finance (example yield farming, algo stablecoins).

Key Takeaways

  • Smart contracts allow people to create new tokens, store funds, receive and send funds, automate transactions, customizations of parameters and logics of tokens and transactions, and act as the mediator/middleman
  • Smart contracts are made up of lines of code using a programming language called Solidity, which will be executed on EVM (Ethereum Virtual Machine)
  • Smart contracts is the gateway for applications to be built on top of blockchain as it allows the integration of front ends to blockchain networks
  • The flexibility of smart contracts also made it possible for people to create smart contracts to call other smart contracts, this creates composability or money legos

Conclusion

Combining both the immutability, transparency, and decentralization nature of blockchain and the trustless, self executing, and self-enforce nature of smart contracts, we are then able to create a new type of applications called Decentralized Apps, which then give birth to Decentralized Finance (DeFi).

Smart contracts have opened a lot of doors on what is possible with blockchain tech. Anyone who knows how to code will be able to create a multi billion financial instrument with little to no resistance. 

 

Do you have any new ideas on how smart contracts can be applied? If you like this article, share it with your friends and families.

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