, 2 years ago

What are Smart Contracts?

Smart Contracts are considered to be the future of cryptocurrencies and more and more crypto are supporting them. But what are these contracts and how do they work?

Programmable contracts

A smart contract is a program that is executed on the blockchain. Many different cryptos have their own programming languages to reach this goal. Others rely on a simple script language. A smart contract is often a set of parameters that are automatically executed if a certain event is triggered.

Let’s say you would like to buy an ICO. You send Ethereum to the address of the company and the smart contract automatically calculates how many tokens you will receive for the amount of ETH that you have sent. Once the transaction is confirmed the smart contract will execute another transaction, only this time it will send you the tokens that you’ve just bought.

This has become a very common use case in the last couple of years. But there are more options to make use of a smart contract:

  • Decentralized autonomous organizations can be programmed
  • Decentralized apps are also based on the contracts
  • Financial services as in DeFi
  • Supply Chain Management for the industry
  • Security tokens are also possible
  • They can be used for governance and voting

While these are only the most likely use cases there are many more possible, since all types of agreements can be met using a program.

Limitations of Smart Contracts

While there are a lot of options at hand, smart contracts are not limitless. A usual contract is an agreement between two or more parties that is legally binding. Should there be a dispute parties can seek legal action in a court.

A smart contract is a one-trick pony. Meaning it will execute only what was programmed and won’t stray from its course. Once set it is set for a lifetime. This comes with some downsides:

  • Smart contracts cannot be changed easily, but parties might want to see agreements changed
  • They have an unclear legal status. Who to address in court? The programmer, the other party?
  • They don’t offer the same legal status. A contract might be certified by a notary. A smart contract is only guaranteed by its code.

Of course, there are several methods to tackle these problems. A smart contract can offer the option for future updates. The same goes for the legal issues. They could very soon be solved by new laws and regulations covering this new form of contract.

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