Smart Contracts
Smart contracts codify and enforce the “laws” of a decentralized economy.
Introduced with the launch of Ethereum in 2015, they represent a significant advancement in decentralized ledger technology.
The first blockchains – such as Bitcoin – required users to manually perform all transactions. For instance, if Alice made a loan to Bob in Bitcoin, Bob would still have to manually access his wallet each month to send Alice the interest payments.
Smart contracts – digital agreements that execute automatically when pre-determined conditions are met – expand on the original idea of Bitcoin by creating a form of “programmable” money.
For example, one could program a smart contract to make recurring interest payments on outstanding debt, pay an employee each time she launched a new product or feature or honor a farmer’s drought insurance claim if the temperature exceeded a certain threshold.
Unlike traditional contracts, smart contracts don’t rely on corporations, banks, lawyers, courts or local laws to guarantee their enforcement. Instead, users trust the technology and its pre-programmed code to automatically execute when they’ve upheld their end of the deal.
Smart Contracts Don’t Need Lawyers, Brokers, Banks, Courts or Governments
Despite the fancy name, smart contracts are just software programs – snippets of code that execute a series of programmed instructions. As such, they aren’t limited to financial transactions or even “contracts” in the traditional sense.
As such, when combined with decentralized ledgers, smart contacts can form fully functional, decentralized computers known as “smart contract platforms” (or “Layer 1 protocols”).
These computers serve as the foundation of Web3. They set the rules for the ecosystem and allow users to create, store and trade cryptocurrencies and digital assets such as NFTs. Much like a traditional computer can host apps such as Airbnb, Uber, Facebook, Tinder and Netflix, smart contract platforms such as Ethereum can host a variety of decentralized applications such as Uniswap (cryptocurrency trading), Aave (lending), LooksRare (NFT creation and trading), Axie Infinity (a blockchain-based game) and can even be used to run entire decentralized businesses known as DAOs.
Smart Contract Platforms are Computers That Can Run a Variety of Decentralized Applications
Unlike conventional computer networks – which are run by centralized third-parties such as Facebook, Microsoft or Google – these platforms retain the same benefits of Bitcoin in that they are 1) distributed (i.e. simultaneously hosted by thousands of different computers all over the world) and 2) decentralized (i.e. not controlled by a single entity).
This gives smart contract platforms several unique benefits, including the fact that they are:
Democratic: No single party can control the network and tell users what they can and cannot do
Open to Everyone: You don’t need permission to use smart contracts and you can’t be blocked – anyone with an internet connection can access them at any time and from any location
Permanent: Because they are hosted on thousands of nodes scattered across the globe, no one can ever turn them off or shut them down
Immutable: Data recorded on a smart contract platform is permanent, and can never be changed or manipulated
Transparent: Everyone can see every transaction on a smart contract platform and easily audit things when necessary
Secure: Information is stored on a decentralized and distributed blockchain, meaning that no one can manipulate the data and there is no risk of information loss
Perhaps most importantly, smart contract platforms give us the ability to create truly autonomous digital nations.
Because they use decentralized ledger technology to store their own funds and smart contracts to enforce their own laws, smart contract platforms don’t need to rely on traditional intermediaries such as banks or courts. As such, they can largely operate outside of the purview of the existing financial and legal ecosystem, allowing them to eliminate many of the costs, restrictions and regulations imposed on conventional networks.
Indeed, as they like to say in cryptoland – “code is law”.
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