FAQ 28 – What is a smart contract?
An autonomous, automatic, immutable and public contract...
A smart contract is a concept that has existed since the 1990s.
Nick Szabo, the precursor of blockchain and bitcoin, sought to use secure and automatic computer contracts on a public network.
The main objective of a smart contract is to conclude a dematerialised and transparent contract without intermediaries.
A contract is immutable, so it can’t be changed once it is integrated into the blockchain, which guarantees its security.
This public contract between two people does not require a trusted third party because of the use of a blockchain. It is automatically enforced, i.e. it executes and enforces itself.
In short, these contracts can be used to exchange all kinds of assets thanks to its infinite applications. Its specificity is its anonymity, as the nature of the transaction and its amount can be known, but not the identity of the people involved.
What is the link between smart contract and blockchain?
The blockchain is the body that lists all transactions carried out.
This register is a transparent, secure database without a central control body in which transactions are secured by encryption. In this system, all participants have access to the transactions, without knowing who is making them.
There are a multitude of blockchains such as :
Ethereum. Litecoin, XRP, Eos, Tron, Monero, Solana, Stellar, Neo or Dogecoin, in which cryptocurrencies are hosted. Ether, hosted in the Ethereum blockchain is the cryptocurrency that allows contracts to be concluded.
The steps in creating a smart contract
Step 1 : The conditions, terms and consent of the contract by both parties are established.
Step 2 : The developer writes a computer program, thus creating the smart contract.
Step 3 : The smart contract is integrated into the blockchain, which corresponds to a transaction between 2 people.
Step 4 : There are 2 scenarios depending on whether the conditions of the contract are met
– If the conditions are not fulfilled: the contract is canceled, so one person gets his money back and the other his property.
– If the conditions are fulfilled: the transaction is carried out so one gets the property.
Smart contracts have some limitations
For the implementation of some smart contracts, an intermediary is needed, which goes against the very concept of the blockchain, which does not rely on a trusted third party.
Furthermore, the immutable nature of smart contracts means that they cannot be modified. However, during the coding of the contract there may be bugs or errors.
The Ether cryptocurrency on which these contracts are based is a volatile currency.