A smart contract is a pre-made agreement written in code that triggers particular actions, like transmitting money or paying interest, whenever the code is activated. Smart Contracts are actually the spine/backbone of decentralized finance, allowing for the development of many new possibilities on the blockchain network.
It’s a piece of code that acts for the event that something else occurs. Many consider this an “If this, then that” scenario.
Let’s say I’ll give you 20 Basic Attention Tokens if you give me 5 Ethereum. If you get 100,000 followers by the end of every year, you will receive 20 Ethereum in your account. This year, if the temperature exceeds 96 degrees for more than four days straight, farmer Jim’s account will be reimbursed $1 million in agriculture insurance.
It would be straightforward to create a smart contract that would allow individuals to give Ethereum to a specific address. For example, we could grant each donor a piece of online work – such as an elegant NFT, access to reading an online book, or membership in a community – if that address achieved a certain threshold, say 500 Ethereum.
When it comes to any digital smart contract, there are two primary reasons why they are advantageous to everyone.
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Smart Contracts can’t be changed.
This implies that they are unable to change. Remember how I mentioned they’re sometimes referred to as “If this, then that “s? Although most smart contracts take action when they have been initiated, this is the case.
They’re code that’s stored on the blockchain and can’t be modified once it’s there. The disadvantage is that if there is a problem, it will remain a bug indefinitely.
You may, however, just establish a new smart contract and instruct users not to utilize the previous one.
Smart Contracts are a type of distributed ledger technology.
This indicates that there are no inconsistencies. You can’t hire an attorney and say, “That wasn’t our agreement!” Smart contracts are online agreements between a few parties that may be performed automatically if specific circumstances are satisfied. A piece of code that is intended to eliminate human mistakes and problems. In reality, even if you wanted to, you couldn’t since the code is on several computers all over the globe, and everyone can view your smart contract. We now have financial accords on which no one can disagree.
3 Practical Examples of Smart Contracts
Now that we understand what a smart contract is, let’s move over some cases of smart contracts:
1) Using an NFT to purchase a home
The last example I’d like to provide is purchasing a home. So, if you haven’t already, watch our video on NFTs because you’ll need to know what they are and why they exist to grasp this example. Then, consider putting the deed to the house or apartment you live in on the blockchain.
A bank, or you no longer own it… it’s now owned by whoever owns the blockchain deed. One day we may be able to utilize a smart contract to purchase and sell a home. Alternately of going into the weeks-long process of advertising, acquiring finance, using escrow, getting insurance, and closing, you could just transmit an offer just on network, which the other party might accept or reject within minutes.
If they accept, you possess the new deed right away, but the other person now gets your money. This would have been highly beneficial to anyone looking to enter the real estate market but being held back by hefty fees, as well as banks seeking a more significant profit percentage on their lending.
2) Switching Tokens
One of the most beneficial things you can do with smart contracts is to create a money pool using two tokens. Then, you make the smart contract so that traders may swap one coin with another.
As one token’s volume rises, the price of the other rises as well, ensuring that the pool’s value remains stable. This is generally how a decentralized exchange works, and if you’re interested in learning more about it, see our new article on Uniswap, which covers it in detail. For example, you may construct a smart contract that says if you give me 30 mangoes, I’ll give you 50 bananas, but the mangoes and bananas are Ethereum and BAT, which is an Ethereum-based asset.
For day traders or investors looking to get into a currency that isn’t listed on a major exchange like Coinbase, token swapping opens up a whole new universe.
3) A Flash Loan
What about if I told you you could get a loan for $million with no down payments?
You certainly can on the Ethereum network. Only if you create a smart contract that pays the money back in the same minute was it borrowed.
That’s correct, and if you know how to code, you can borrow millions of dollars to perform something for you on the Ethereum network. The drawback is that the money must be repaid in full.
Why would we want to do anything like this?
Consider buying Dogecoin on Coinbase for 50 cents and selling it on Gemini for 55 cents.
You could hypothetically borrow millions and use it to purchase a boatload of dogecoin on Coinbase, then sell it to CoinDCX and start repaying the millions of loans plus interest.
This is known as a flash/quick loan and one man who made $450,000 in a matter of minutes with one that worked similarly to the example I just gave. The smart contract may simulate what you coded to see whether what you order it to do will be able to pay back the loan. If it can, it will.
What are the benefits of smart contracts?
The significant benefit of smart contracts is their autonomy. There is no need to pay intermediaries if there is no go-between. This can help you save a lot of money on large transactions. Furthermore, there is no need to rely on mediators to accurately and promptly validate and execute smart contracts. Smart contracts, as a consequence, can be less expensive, quicker, and safer than regular contracts.
Furthermore, smart contracts inherit the distributed ledger’s openness and security. All transactions on a public ledger are accessible to all network participants. This openness allows you to double-check your transaction and be confident that everything went as planned. Furthermore, in a distributed ledger, your transaction records cannot be easily edited or erased, and if they are, the change will be apparent to you. These benefits of security and transparency are only available with public ledgers and smart contracts.
Eventually, blockchain networks make even the most complicated transactions simple. Smart contracts may be used for basic transactions, but they can also be used to establish and create through the process multilateral trades on time. Even the most complicated transactions can be coded using languages like Solidity, and once completed, a smart contract may be reused time after time. Furthermore, numerous smart contracts may be utilized in combination to carry out even more complex transactions.