Smart Contracts, Explained

How smart contracts appeared?

A famous cryptographer Nick Szabo was the first man who purposed the method of digital currency and smart contracts. This happened in 1994 and as there weren't any platforms that could support this kind of technologies, Szabo's idea remained on a shelf.

In 2008 the invention of the Bitcoin and the blockchain it’s operating on became the proper atmosphere for procedures with smart contracts. Nowadays, with the growing fame of cryptocurrencies and the growth of transactions done with them, numerous platforms like Ethereum and Bitcoin are implementing smart contracts.

What is a smart contract?

In a few words, smart contracts are comparable to actual life contracts, but in the digital area. A smart contract is an adjustment among two sides printed in machine code. The Smart contracts are saved in the blockchain system, so once they’re signed they can’t be modified. As you know, the blockchain system lets us act without a third party, this means that there isn’t one person, who can choose to make changes or to invalidate the agreement. So, the transaction is going to be completed only when two parts of the agreement are done. 

How do they work?

All we know from the history of changes that were made in contracts and changed the direction of history. For example, when Francis II of France married Mary Queen of Scots they signed an agreement. Later mother of Francis, Catherine de’ Medici, changed some paragraphs in that contract. That changes could bring Mary to death if she didn’t find that record at the right moment. So this’s a short historical explanation, why real-life contracts aren’t reliable (and seldom dangerous, if you’re living in the 16th century). 

A fundamental part on which smart contract is running is a blockchain, so when you sign this kind of contract every block in the chain stores info about it, and when you try to modify something the platform doesn’t recognize your modifications. This happens due to hashes. 

Every block owns a specific hash. Hash is something like an ID. It’s a unique code that identifies a block. Each succeeding block in the chain owns a hash and stores info about the preceding block’s hash. The initial block in the chain is named Genesis because it doesn’t hold data about the preceding block (it’s obvious because there isn’t a previous block). Let’s understand this by an example. 

So, let’s imagine that our Genesis block hash is “e4k5ir85kr8573h5738”. We’re signing a smart contract, info about which is appearing in the second block. The second block has its hash “u67485e547e638” and it stores data about Genesis hash. The third block with the hash “t5467e5435u” also stores the hash of the second block “u67485e547e638”. Now when we want to modify something in our contract the hash of the second block changes, and the third block notifies about an error and the whole chain doesn’t operate. This’s why you can’t make any modifications in the signed smart contracts and this’s an extra good reason to trust this kind of contracts more than to actual life contracts. 

Smart contracts’ objects

As a simple contract, smart ones have some required objects so they can work. 

First required point is two or more sides, who are making an adjustment using their digital signatures.

The second point is the subject of the contract. It needs to be something that exists distinct from a smart contract. 

And the last third detail is the availability of particular terms. This special terms must be printed applying a programming language that matches the smart contract and they’re required to be described with mathematical algorithms.

The reasons to choose smart contracts

There’re various obvious good sides of choosing smart contracts.

Due to blockchain no one can lose, steal or change your records.

There’s no need for third-party and you’re the one, who has full control of the settlement.

As smart contracts are protected with special cryptography, they’re very difficult to hack. So they’re absolutely safe.

With smart contracts, you’re saving your time, as you don’t have to transfer or transport papers to specific places.

The last but not the least is that you’re saving capital, cause there’s no necessity to pay notaries, assistants or estate agents.

How smart contracts are changing the world?

There are already numerous examples of corporations, who are adopted smart contracts in their everyday functioning ecosystem. Let’s consider a few of them. 

Healthcare:

The best instance in this sphere is Encrypgen. It is an app that lets the patient get his information in a safe method implementing smart contracts. Additionally, the application gives a patient an opportunity to decide whether to sell his info to researchers or not. And this’s also done by smart contracts.

Insurance companies:

There’re two insurance firms one in Malta and one in France that are already working with smart contracts. That kind of insurance works mostly with tickets and flights. You’re paying $10 to the insurance company via smart contract, company in its turn sends $90 to the smart contract. If your flight is on time the company gets $100, and if it’s delayed you get $100. All process is automatic so you and the company workers save a lot of time.

ICOs:

ICOs’ sphere is one of those, where smart contracts are practised most often. 

You’re launching ICO and you want to gather $30 000 000 for your project. Let’s imagine that $30 000 000 equals 30 000 Ether. You make a new coin called AM. And you put 100 000 AM coins into the smart contract. That means your 1 AM worths 0.1 Ether. And at the end of the flourishing ICO, when you sell all your 100 000 AM coins you’ll get the money you needed.

One question that will occur, when you’ll decide to run an ICO, is why investors want to buy my coin?

The answer is plain. The first cause is that there is hope if your project becomes more popular, your coin will worth more than when they bought it. So, they can just resell it and have a profit. The second cause is that they may use these coins in your application when it’s ready. 

Now we clearly see that soon we will live on a planet without third-party. Thanks to smart contracts.