What is a Smart Contract and how does it work?

3 min reading
Neo Cryptocurrency and the Smart Economy

Smart Contract is the next step in the blockchain technology development. It transfers the protocol of financial transactions to a universal tool, which will implement contract terms automatically. This will minimize the risk of errors and manipulation.

Bitcoin was the first to introduce smart contracts, allowing payments between users. Bitcoin's limited coding language did not allow the development of its own block applications. That’s why Vitalik Buterin had created his own platform – Ethereum. However, the first introduction of smart contracts happened far earlier - Nick Szabo introduced the idea in 1994.

Smart Contracts’ goals

First, let’s think about the reason people even need contracts. It's all due to the lack of trust between the parties of the contract. Not knowing the seller or the buyer is a standard in the modern world, especially in online transactions. Smart contracts are an ideal solution to ensure that all types of interpersonal transactions can be beneficial to all interested parties.

What is a Smart Contract?

Smart contracts, like traditional, paper contracts, are a guarantee of trust. There are, however, some differences between the two. They’re not a stack of paper filled with legal and incomprehensible language. It usually takes a lot of time for lawyers to review contracts in legal terms. Smart contracts are simply programs that operate on the Ethereum platform as a part of blockchain technology. Their role is the same as a paper one: to legally bind anyone who intends to participate in the contract. It's nothing but code lines written in Solidity language, that could be compared to JavaScript. This code is then converted to byte code and released into the block as a smart contract. Each contract has its own block address.

What makes Smart Contracts so popular?

There are quite a few reasons for why exactly are smart contracts better than the traditional ones. They provide simplicity, speed of execution and real-time updating. In addition, they are able to eliminate the excess of centralized entities and other intermediaries who often increase risk. They are completely independent, so there is no delay in providing agreed contract terms. Blockchain technology ensures transparency, reliability and security of the smart contract’s performance.
Only a few sectors of the industry use smart contracts. Some of them already have a real application or companies involved in this field, but the use of smart contracts is still under development. CCG Mining is one of the leading companies in the cryptocurrency market that offer smart contracts, so you can use the platform to create and execute contracts without the need for specialized knowledge about block coding. Michał Kwieciński, CCG Mining CEO, explains:

The smart contracts working on the blockchain will surely have a great impact on the financial industry, as well as an entire economy. Thanks to the blockchain technology, the features of smart contracts, such as the ability to safely receive, store and send information - will help to reduce the need of brokers in the transaction process, improve transparency, reduce legal disputes, mitigate risks and become the standard for countless types of transactions.

How does Smart Contract work?

The blockchain technology uses Ethereum platform to process smart contracts. Ether, a cryptocurrency playing the role of the fuel, is used to pay for computing power to process contracts. However, the fees are minimal compared to lawyers or intermediaries involved in trading. The ideology behind smart contracts is quite simple because they are implemented on the basis of the IF-WHEN-THEN decision-making method.

Of course, the future of business will dictate that contracts will become a hybrid of traditional paper agreements and Smart Contracts, often referred to as a contract consisting of paper and code. This means that, although there is a real copy of the contract, the details are verified or authenticated by means of smart contract programs.