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You’ve probably heard a lot of buzz about smart contracts in the cryptocurrency space, but what exactly are they? Like blockchain as a whole, smart contracts are about cutting out the middleman and having a system that exists without the need for an enforcing party.
A smart contract is essentially lines of code that are very to very specific procedures so that once deployed, it can’t be changed. Once a smart contract is written then there is no need for an enforcing party to review the contract and argue over what conditions were met, the way a traditional contract would work.
How Do Smart Contracts Work?
Ethereum is the second-largest cryptocurrency by market capitalization and is almost certainly the most well-known crypto after Bitcoin. However, Ethereum isn’t just a cryptocurrency, Ethereum is a platform that runs on a cryptocurrency called Ether. In order to build apps or make smart contracts on the Ethereum platform, users need to have the Ether digital currency.
Let us consider an example of a simple smart contract. Jane wants to sell her car for 15 Ether and Georgia is happy to buy Jane’s car for that price. We can set up a smart contract that states “WHEN Georgia pays Jane 15 Ether, THEN Georgia will have ownership of the car.”
Once this smart contract has been decided on and created, then it can’t be changed. This cuts out the need for intermediary figures to weigh in on agreements and act as a trusted party. Since smart contracts exist on the blockchain platform, they are working from a “trustless” model. Blockchains are decentralized; meaning that put simply, thousands of computers are responsible for verifying transactions and contracts, rather than one acting party such as a bank.
Why Are Smart Contracts Important?
Smart contracts are still in their infancy but the uses of smart contracts are near endless. Smart contracts can provide a faster and more efficient way to handle contracts, as well as cutting down on legal fees. Smart contracts would be greatly suited to the banking and financial sectors for contracts like mortgages and settlements.
Another valuable use case for Ethereum smart contracts is in escrow services. With a smart contract, there will be no need for a trusted middleman to hold funds to regulate transactions between two parties, a smart contract can handle the whole process without the middleman.
Smart contracts represent a way of handling contracts and transactions that is more suited to the modern world than our current methods which have inefficiency and complexity built into them.