What are smart contracts? Types, benefits & use cases explained

With the development of IT technologies and blockchain platforms, a new type of contract has emerged: smart contracts.

In this article, we will examine smart contracts and how they are used today.

What are smart contracts? Smart contracts explained

What is a smart contract? It’s like a self-running digital agreement with all the terms and conditions written directly into the code. It works on a blockchain network, so the contract is automatically executed and enforced when the set conditions are met.

There is no need for intermediaries such as lawyers or banks because the rules of the contract are transparent and cannot be changed once implemented. Essentially, smart contracts in cryptocurrency facilitate and secure transactions, making them faster, more efficient, and less dependent on third-party oversight.

historical background

The concept of smart contracts dates back to the mid-1990s, when computer scientist and cryptographer Nick Szabo first proposed the idea.

He designed a digital protocol that could automatically enforce the terms of a contract when predefined conditions are met, similar to a vending machine that dispenses snacks when the correct amount of money is entered.

However, it wasn’t until blockchain technology emerged, especially with the launch of Ethereum in 2015, that smart contracts took off. Ethereum’s blockchain has given developers the tools to create and run code that can handle complex transactions on its own. This breakthrough has led to a wave of new decentralized applications that are shaking things up by automating transactions and eliminating the need for intermediaries.

How do smart contracts work?

Smart contracts use simple “if/when…then…” commands written on the blockchain. They automatically perform tasks such as releasing funds, recording assets, or sending notifications when conditions are met. Blockchain’s permanence ensures that transactions can only be viewed by authorized parties.

Smart contracts can get quite complex, containing a variety of conditions that everyone must agree on. This means deciding how to record transactions, handling exceptions, and figuring out how to resolve disputes.

Each node in the network stores a copy of all smart contracts along with the blockchain and transaction data. When a contract receives funds, all nodes run the contract’s code to agree on the outcome, ensuring everything runs smoothly without a central authority.

Not every blockchain can execute automated contracts, so it’s good to know which ones do and which don’t. Platforms like Ethereum, Arbitrum, Avalanche, Base, and BNB Chain do this, while others, like Bitcoin’s underlying blockchain, do not. The main difference is whether a blockchain can process and store complex logic. Once a smart contract is established, it usually remains as is, even for those who created it. This stability helps it resist censorship and prevents it from being shut down easily.

Smart contract types

Smart contracts on blockchain are generally divided into three types:

Smart Legal Contracts

Smart Legal contracts are designed to be compatible with formal legal agreements; This means that the parties involved are legally responsible for fulfilling the terms of the contract. These can range from contracts that facilitate conversions from cryptocurrency to fiat currency to contracts that govern real estate records.

Most existing smart contracts are legal in nature and support a variety of platforms, including cryptocurrency exchanges, DeFi projects, GameFi projects, and blockchain-based platforms such as NFT marketplaces and real estate tokenization platforms.

Decentralized Autonomous Organizations

DAOs are communities governed by a set of rules hardcoded into smart contracts. Once these rules are established, DAOs use these agreements to enforce the rules, provide legal mechanisms for protection, and impose penalties for violations. Essentially, DAO smart contracts function as the organization’s laws and “digital” bureaucracy.

Examples include governance protocols for Decentraland, Uniswap, Polkadot, and MakerDAO. Governance in these projects is handled by local token holders, who can propose changes (such as adjusting fee structures, changing blockchain code, or adding/removing parachains) and vote on them. The DAO contracts manage the voting process and count the votes.

Application Logic Contracts

ALCs operate under a governance program and are primarily tasked with managing interactions between that program and the blockchain. For example, ALCs can facilitate the integration of IoT devices with blockchain.

Benefits of smart contracts

The advantages of using blockchain are impressive for individuals, businesses and governments.

Transparency: One of the biggest advantages is transparency. Every transaction on the blockchain is public and verifiable, so once data is added it cannot be changed. This means you can trust that smart contracts are secure and not tampered with; giving you peace of mind when using them personally or for business.

Cost efficiency: Smart contracts take care of a lot of the legwork when it comes to creating and managing contracts. They save money and simplify processes because they do not need intermediaries such as lawyers, banks or brokers.

Building trust: Because smart contracts are automated, they reduce the possibility of human error and build trust between parties.

Secure storage and backup: Data loss is a major risk for any organization. While backups are important, they are not always perfect. However, Blockchain technology keeps data across many nodes; Therefore, as long as the blockchain works, there is much less chance of data being lost or tampered with.

Security: Smart contracts are incredibly secure thanks to advanced encryption and security protocols. They are some of the most secure means for conducting transactions today, and just like cryptocurrencies, they offer strong protection against hacking and tampering.

Usage examples

Cryptocurrency token smart contracts are used to create, manage and assign ownership of specific digital tokens on blockchain networks. These contracts program the functions of the tokens they issue, giving them various roles.

For example, they could enable tokens to serve as utility tokens for apps (that offer features or benefits within an app), governance tokens that give their holders the power to vote on a protocol, security tokens that represent shares in a company, or NFTs that represent ownership of a unique company. physical or digital assets.

Smart contract examples

Examples of smart contracts in practice:

Ethereum. Ethereum allows developers to create dapps and forms the basis of many DeFi projects. Smart contracts on Ethereum are extremely flexible and handle everything from converting real-world assets into digital tokens to automating transactions. It is the center of many groundbreaking blockchain activities.

There is also Binance Smart Chain. It is famous for its speed and efficiency. While it is compatible with Ethereum, it offers lower fees and better performance, making it an excellent choice for a variety of projects. Due to these advantages, it has become a popular choice for DeFi projects and tokenization.

Polka dot. Polkadot’s goal is to connect different blockchains. It allows you to create parallel blockchains that can interact with each other and increases the interoperability of the blockchain by supporting smart contracts for various applications.

Chain link. Chainlink is like a bridge that connects smart contracts to the real world by providing external data. Thanks to decentralized oracles, these contracts have access to real-time information, making them more dynamic and adaptable.

The future of smart contracts

The future of smart contracts is bright and full of potential. As technology continues to evolve, these contracts will become smarter, safer and more efficient. This is thanks to ongoing upgrades in blockchain technology and better programming tools.

We will see these technology agreements revolutionize industries beyond finance and legal, impacting areas such as supply chain management and government operations. As a result, smart contracts are poised to become a major force in shaping the future of our digital world.