What are Smart Contracts? For those of you who are already familiar with the world of blockchain and cryptocurrency, the term smart contract is certainly familiar to you. However, for those of you who have just entered the world of investing and cryptocurrency transactions, the term smart contract is still quite foreign to the ear.
In fact, as someone who is active in the world of cryptocurrency and blockchain, smart contracts are one of the things you should know. So, what is a smart contract? Here we will explain a little about smart contracts in this article.
The History of the Emergence of Smart Contracts
Smart contract technology first appeared in 1994 which was created by a cryptographer named Nick Szabo. The name Szabo itself is currently enshrined in one of the terms of the Ethereum technology unit.
Szabo had an idea that had never come before. Szabo had the idea of creating a contract by using computer codes. The contract will be activated automatically if the specified terms and conditions are met.
Apparently, the invention of smart contracts by Szabo means that people don’t need a third party to administer certain contracts. This is because smart contracts allow people to conduct transactions directly with other parties using certain trusted networks via computers.
Unfortunately, in 1994, blockchain technology had not yet been invented. Thus, Szabo’s smart contract technology cannot be used. Only after that, blockchain and bitcoin technology was discovered by someone under the pseudonym Satoshi Nakamoto.
The smart contract project was continued by a young genius named Vitalik Buterin. Buterin leverages the existence of blockchain technology to enable smart contracts. As a result, the smart contract that we have known so far was created.
What are Smart Contracts?
In simple terms, a smart contract can be defined as an agreement between two parties that is formed in computer codes. Smart contracts do not require a third party because they directly involve both parties who make the agreement.
Smart contracts are a new technology that uses a blockchain technology network as a medium to activate smart contracts. Thus, the smart contract will be activated immediately when the pre-defined conditions are met.
Before starting the agreement, the two parties will usually make certain provisions to make the contract that is made active. Thus, smart contracts do not need to use third party services, making them more cost and time efficient.
Difference between Smart Contract and Conventional Contract
The main difference between conventional contracts and smart contracts lies in the presence of a third party in the pre-determined agreement process. In conventional contracts, you must use the services of a third party to manage the agreement.
Usually, when making an appointment, you’ll need to contact specific attorneys and agents to sort out the agreement. This of course will increase service fees or commissions for other parties involved.
Meanwhile, smart contracts do not need to use the services of a third party. The contract that will be made is directly managed by both parties by utilizing a blockchain network that is connected to the internet. You simply access your smartphone or computer to be able to sign a contract.
You simply agree on what terms you will make with the second party. If so, you can simply create a smart contract with pre-defined conditions. Automatically, the smart contract will be active and the agreement is valid.
For example, you want to buy a plot of land with an area of 500 square meters to your friend for 500 million rupiah. If you use a conventional contract, then you still need to prepare funds to pay for the services of the third parties involved. It will cost you more than 500 million rupiah.
However, when you use a smart contract to make transactions with your friends, you can simply create a smart contract in the blockchain network. After all the conditions of the agreement you made are fulfilled, the smart contract will automatically be activated.
Data in smart contracts also tends to be permanent and immutable. Therefore, the parties to the agreement will tend to feel safe because it minimizes the potential for fraud by certain parties.
Use of Smart Contracts in the Blockchain World
Smart contracts are often used in the blockchain world. One of them is in terms of making contracts to create certain blockchain-based projects. Usually, the project to be implemented will require funds that are embodied in cryptocurrency in the form of Ethereum.
One way is to carry out the Initial Coin Offerings (ICO) process or in simple language is the collection of funds for blockchain-based projects. Usually, the project owner will conduct an ICO to get funds from investors.
Later, the investors will deposit a certain amount of cryptocurrency which is equivalent to a certain amount of money to the project owner. After that, if the project has been built and is running, the investor will get a fee according to the percentage of the amount he previously gave to the project owner.
The process of getting compensation and investing in the ICO is what uses smart contract technology. If the conditions are met, the project will automatically run according to what is in the smart contract. In addition, if the conditions are met, the cryptocurrency that will be obtained by investors will also be sent automatically.
For example, a company wants to build its own blockchain-based project. However, they need funds for project development, while their funds are already limited.
The company also conducts an ICO on the blockchain network and hopes to raise funds, for example 100 billion rupiah. Let’s just say 100 billion rupiah is equivalent to 100 thousand Ether.
However, you cannot place Ethereum in your smart contract. You also decide to place 1 million tokens belonging to your company in the smart contract that you have created.
Assume that your company token has a value equivalent to 0.1 Ether. Therefore, for investors who want to own at least one company token, you must provide 0.1 Ether to the smart contract that you have created.
When the funds you need are met. The smart contract will be activated automatically and the project can be started. After that, if the project is completed and makes a profit, the investors will automatically receive a refund of a percentage of the previously sent Ether of the total amount of funds required in the project. If the project is growing, the compensation will be even greater.
Use of Smart Contracts Outside the Cryptocurrency Field
In addition to the cryptocurrency world, smart contracts are also used by several fields, such as insurance, health, government, and business. In the world of insurance, smart contracts are usually used to compensate customers for certain accidents or losses for goods or services that have been claimed by insurance.
Meanwhile, in the world of health, the use of smart contracts is usually used to send medical history data to patients privately and confidentially. People who want to access the data are required to pay and the decision remains in the hands of the data owner, namely the patient and the hospital.
In the government sector, the use of smart contracts can be used in the context of general elections or elections for certain regional heads. A person just has to vote through a smart contract and the smart contract will immediately issue the results. The use of smart contracts in government is considered more secure and confidential than voting as usual.
In the business field, smart contracts can be used to pay the salaries of employees in a company. Thus, the salary of the employee will be on time and never late.
So, that was a little explanation about what a smart contract is? Hopefully it can add insight and be your consideration to enter the blockchain world. That is all and thank you. See you in the next articles.