How Smart Contracts Using Blockchain Really Work

MakeUseOf | 9/21/2018 | Gavin Phillips
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A smart contract is a piece of code that works with a blockchain to enforce the terms of a particular contractual agreement. They allow trusted transactions to take place between anonymous parties, thereby creating a transaction record that’s transparent, traceable, and irreversible—all the while eliminating the need for third-party middlemen.

Sounds great! But how does a smart contract really work?

Smart - Contract

What Is a Smart Contract?

Even though smart contracts feel like new technology, they were first proposed back in 1994 by American computer scientist, Nick Szabo. (Nick Szabo is alleged to be Satoshi Nakamoto, the creator of Bitcoin, but he vehemently denies it.) Szabo’s paper theorizes smart contracts as a “computerized transaction protocol that executes the terms of a contract.” Put forth way ahead of their time, many of Szabo’s proposals have now become the central features of a modern smart contract.

Smart - Contracts - People - Exchange - Things

Smart contracts help people by facilitating the exchange of things by way of computer code. In a sense, smart contracts are glorified examples of “when X takes place, do Y” code. Blockchain-based contracts bring the control of financial transactions back into the hands of users and vendors (away from institutions like banks) while ensuring there is a permanent record of those transactions.

Unfortunately, the term itself—“smart contract”—causes confusion. When you think of a traditional contract, you think of a signed piece of paper that outlines details of a legal agreement. A smart contract doesn’t just outline but enforces the terms of an agreement using cryptographic code linked to the blockchain.

Contracts - Ethereum - Bitcoin - Contract - Support

While smart contracts are predominantly associated with Ethereum, Bitcoin has always had basic smart contract support. It’s just that Bitcoin’s limited programming language made it difficult to create worthwhile smart contracts. Ethereum later came in and took up the mantle with smart contracts based on an easier-to-code programming language.

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