Smart contracts have many advantages, including features that make them transparent, efficient, and secure. Keep reading to learn more about smart contracts, how they’re used, and how you may use them in the future.
Definition and Example of a Smart Contract
A smart contract is computer code, often hosted by the Ethereum blockchain, that can store and automatically execute a financial or legal agreement. A smart contract may be a simple bit of computer code or a lengthy, detailed set of instructions comprising up to 24KB of information. Smart contracts play a key role in the operation of DAOs, which are blockchain-based organizations that operate fully independently without being governed or controlled by any centralized group. While DAOs can exist for a variety of purposes, one example of a DAO that uses smart contracts is the blockchain platform MakerDAO. This DAO, which supports the DAI stablecoin, uses the MKR token to facilitate decentralized governance of the MakerDAO platform.
How Smart Contracts Work
Like cryptocurrencies, smart contracts operate using blockchain technology. Smart contracts, by relying on if-this-then-that logic, are akin to digital vending machines. Let’s delve into how smart contracts work:
How Smart Contracts Are Used
Smart contracts can have many different applications, including:
Financial agreements and financial services: Smart contracts can be used to clear and settle securities trades, and can manage financial documentation.Legal contracts: Smart contracts can automatically enforce legal agreements by facilitating the payment of funds upon certain triggering events or imposing financial penalties if certain conditions are not satisfied.Real estate transactions: Real estate agents may use smart contracts to automate the closing process for home purchases.DAO governance: Decentralized autonomous organizations rely on smart contracts to facilitate broad-based decision-making.Non-fungible tokens (NFTs): Smart contracts can facilitate transactions and storage for non-fungible tokens.Health care management: The management of medical records and medical systems can be automated using smart contracts.Supply chain documentation: Smart contracts can increase the transparency of supply chains by increasing access to documentation.Public-sector record keeping: Governments can use smart contracts to automate how public records are collected and maintained.Voting: Elections can be conducted using smart contracts to verify voter identities, record votes, and determine outcomes.
A savvy developer could build a smart contract to split dining costs with friends or the monthly rent with roommates. You could run an investment club that uses smart contracts to collect and distribute funding.
Pros and Cons of Smart Contracts
Pros Explained
Transparent: Smart contracts are accessible to everyone in a blockchain network. Efficient: Smart contracts can be programmed to execute automatically. Secure: Smart contracts benefit from the security features of blockchain technology.
Cons Explained
Require technical computer knowledge: Using smart contracts can be simple, but creating them requires coding knowledge.Limited adoption to date: Smart contracts have immense potential but are not yet widely used outside of the cryptocurrency community, which in practical terms limits their usefulness.
Do I Need Smart Contracts?
You don’t need smart contracts. These types of digital contracts have many uses, and important advantages over traditional agreements, but smart contracts are not yet widespread. Smart contracts will likely become more commonplace in the future, with major digital asset platforms like Ethereum already heavily using them.
