What Are Smart Contracts and How Do They Work – Simply Explained for Beginners

Smart contracts are electronic contracts that enforce and verify agreements as written in code. Since the future of cryptocurrency hinges on smart contracts, let’s take a look at what they are and how they work.

I have a question for all of you. Have you ever heard of Kickstarter? When you want to pursue an idea, but you can’t do it alone, you basically make a page and show off your idea hoping that other people will help you out with donations. For example, I may have an idea for a book that teaches cryptocurrency ideas and concepts. I would make a page stating that I am attempting to get $1,000 in donations. If people donate at least $10, I’ll give them a book. It took around a week, and I came up with $1,300 in donations. Once I reach my goal of $1,000, Kickstarter will provide me with all of the money that has been donated. Though if I didn’t reach the $1,000 goal and my grandma donated $1,000, I would not get any money, and all the people who donated would get their money back.

This smart contract is simply a piece of code that executes certain commands. These people are referring to something like If A, then B. The most popular smart contracts are written on the Ethereum network and use Solidity. Let’s explore how a smart contract can work with these as examples. If you send me five Ethereum in exchange, I will send you 20 Basic Attention Tokens. If you have over 100,000 subscribers, you will receive an additional 20 Ethereum this year. Additionally, if the temperature is above 95 degrees for more than four days, you will receive $100,000 as crop insurance this year.

With a smart contract, we could easily automate donations where a particular recipient is eligible to receive, say, 500 Ethereum. Every person who donated would be rewarded in the form of an artwork or some digital in-game collectible or something more tangible like reading a digital book. The potential of smart contracts is immense, but two specific aspects of them make them helpful to everybody.

Why Are Smart Contracts so Important to Cryptocurrency?

First of all, they are immutable, which means they do not change. I mentioned that many people call smart contracts ‘if this, then that’ because most smart contracts react to a triggering event by doing something. Those are coded on the blockchain, which executes the smart contract’s code. There are upsides and downsides to that; if there is a problem or the code isn’t well done, it will be there permanently. While that’s the case, you could make a new smart contract and notify everyone not to use the old one if you wanted to. That’s often the case.

A second important thing to know is that these words are spread out, meaning that there is no issue with disagreement. That is, you can’t hire a lawyer and claim. I had a completely different agreement with them because a few parties executed these smart contracts. In this context, smart contracts refer to an all-computer code that, in effect, removes any possibility of human error or issue. In short, if you can afford a lawyer, it may not be worth your while. Anyone who looked would be able to find your smart contract and trace how you were involved in it. We have standardized financial agreements because nobody can contest them when they’re written in code, the code never changes, and everyone has access to them.

What are Smart Contracts in Crypto?

Are you wondering what a Smart Contract is? Well, a smart contract is an agreement between multiple people who agree that a piece of code will be executed if certain conditions are met. Right now, I know of 4 main use cases for Smart Contracts, and they are:

1) Flash Loans

2) Insurance

3) Token Switching (Decentralized Exchanges)

4) Buying and Selling real world representations

Watch our animated video on Smart Contracts to understand how each of these examples currently work and what their potentials are in the future!

Smart Contracts – Explained with Examples (Animation)

A Smart Contract is a set of computer codes built on the blockchain, which executes only when its predetermined conditions are met.

It operates according to a set of rules based on IF THEN.

That means that the contract’s function will be executed only when its predetermined conditions are satisfied and without interference of a third party or intermediary.

Imagine you’re interacting with a vending machine.

When you put your money into the vending machine, it immediately provides you with your desired choice.

Thus the need for an intermediary between you and the machine has been removed, since the logic was programmed into the machine itself.

In this situation your money is the required “if” condition, and the drink you received was the execution.
This is the same way smart contracts operate.

This is what enables developers to build a near limitless range of applications and protocols on the blockchain.

Smart contracts were first introduced on the Bitcoin blockchain, but were very limited in their functionality.

Then a revolution occurred when Ethereum introduced its platform for developing smart contracts, which has opened limitless possibilities of use cases and applications.

The main benefit of smart contracts is that they are permissionless, meaning anyone can build a contract and deploy it to a blockchain network.

They are also very secure, as blockchain cryptography leaves almost no possibility of successful hacking attempts.

In addition to that, security is fortified through contract immutability, meaning that once deployed, its code cannot be changed nor interfered with

The future will be decentralized | Charles Hoskinson | TEDxBermuda

This talk was given at a local TEDx event, produced independently of the TED Conferences. Tech entrepreneur and mathematician Charles Hoskinson says Bitcoin-related technology is about to revolutionise property rights, banking, remote education, private law and crowd-funding for the developing world.

Charles Hoskinson is Chief Executive Officer at Thanatos Holdings, Director at The Bitcoin Education Project, and President at the Hoskinson Content Group LLC.

Charles is a Colorado-based technology entrepreneur and mathematician. He attended University of Colorado, Boulder to study analytic number theory in graduate school before moving into cryptography and social network theory.

His professional experience includes work with NoSQL and Bigdata using MongoDB and Hadoop for several data mining projects involving crowdsource research and also development of web spiders. He is the author of several white papers on the design and deployment of low bandwidth prolog based semantical web scraping bots as well as analysis of metamorphic computer viruses through a case study on Zmist.