In the world of blockchains and cryptocurrencies, smart contracts are programs that are made to follow up an action with a trusted calculated action. Put simply, a smart contract service is software programming that adds more layers of information into transactions run by blockchains. With the help of a blockchain developer, smart contracts allow for the execution of complex transactions that go beyond just exchanging digital tokens for a product. Basically, it protects each party by holding everyone involved responsible and providing absolute transparency up front.
The Introduction of Smart Contracts
Nick Szabo, a computer scientist who invented the virtual Bit Gold in 1998, first thought up smart contracts in 1994. Those familiar with Bitcoin’s history have probably already heard the rumors that Szabo is the real inventor of Bitcoin, something he’s always denied, but that’s not entirely relevant to smart contracts anyway.
As far as his original smart contract concept, Szabo explained it as a way that computerized transactions could work under a protocol that executes as a contract. He wanted to introduce the functionality of electronic transactions to the digital world. This idea was geared toward synthetic assets in its early stages, and many of the predictions he made about the use of smart contracts in derivative trading – through computer networks using complex term structures – have come true.
Szabo’s ideas of smart contracts developed over the years, and in today’s blockchain and cryptocurrency environment, have become widely accepted and understood by users. In modern terms, if the blockchains provide distributed storage, smart contracts give us distributed calculations.
How Smart Contracts Make Blockchains Different From Bank Accounts
Certain elements of bank accounts act like smart contracts. Say a bank account has a balance, and from that balance an automated payment is made every month in a fixed amount. If there isn’t enough money to cover the payment one month, a fine is triggered by another workflow. This is a simple way of describing what a smart contract does in everyday applications; the difference would be that a smart contract running on a blockchain is controlled by many parties, instead of one in the example of the owner of a bank account.
How is this better than automated payments through the banks? Well, the answer lies in the very idea of a banking account. When you open a banking account, you only have the illusion of ownership as the bank itself is the ultimate gatekeeper to your account. If you’ve seen money come out of your bank account arbitrarily, you’re not alone, and you probably had to argue a good deal to get it back. In the blockchain environment, there’s not a single controlled or owned account, so anything that doesn’t abide by the previously agreed-upon rules is detected and rejected by other participants.
Bottom Line: Transparency and Accountability Are Key
With smart contract services running on a blockchain, all participants are able to compare results and can only change their personal version of the ledger. The theory of this is that no one would be able to cheat the blockchain. This also creates a level of transparency that can be verified and monitored through all parties since the smart contract has to be visible to all users. The downside of this level of transparency is that everyone in the network can see what’s happening, not just the stakeholders.
The current blockchains have several levels of smart contract services. Just keep in mind that not all smart contracts are the same, and not all blockchains support smart contracts. From an employee being able to receive their paycheck in their account by the hour, instead of by the week, to make trades and investments, smart contract services can elevate the possibilities of blockchain through an added layer of accountability and transparency.