Smart Contracts are nothing but self-executing computer programs containing codes that store some logic or rules within them. These self-executing contracts automatically verify their in-built Logic and execute them when conditions are satisfied. Smart Contracts are the digital version of the physical contracts existing in the real world. A public distributed ledger system known as the blockchain incorporates these smart contracts in order to perform certain functions and automate tasks or transactions.
Now you might ask. what is the meaning of a public distributed ledger system ? Well, A distributed ledger system is a record-keeping system where the record of information relating to financial transactions and other types of transactions are maintained across several computers or nodes. This system of decentralization of data has several advantages. One advantage of using a distributed ledger is the reduced risk of illegal modification of transactions or data by
Smart Contracts were first introduced by computer scientist Nick Szabo in 1994 who proposed the idea of digital contracts. These digital contracts are programmed using a programming language called Solidity. Smart contracts eliminate the human factor or trust element required to execute an ordinary contract.
What is an Ordinary Contract?
Ordinary Contracts are legal or non-legal agreements between two or more parties that heavily depend on trust for the proper execution of the conditions of the agreement. Another common trait of ordinary contracts is the deployment of a third party to ensure that the conditions mentioned in the contracts are properly adhered to.
Scope of Smart Contracts
Smart Contracts find their extensive application in decentralized finance (DeFi) where decentralized applications (DApps) use smart contract codes to achieve their goals of decentralized transactions.
Smart Contracts in Dapps automate transactions safely and replace the need for any third party or intermediaries.
Decentralized Finance or Defi is a financial system based on blockchain technology. Defi makes use of the public ledger system where Smart Contracts play a vital role in executing transactions without the need for third-party financial institutions like banks acting as intermediaries. The entire system of DeFi is a peer-to-peer system with no trust element involved in the process. Dapps in Defi decide how a party involved interacts with the blockchain in order to execute the smart contracts.
Advantages of Smart Contracts
- Smart Contracts as used in blockchain platforms such as Ethereum is a technology with the potential to revolutionize the financial system. These contracts completely eliminate the need for third parties to act as a facilitator during transactions. And so, there is less trust
element and more automation, making the transactions more secure and functional.
- A higher level of autonomy for the parties involved as Smart Contracts is an essential component in the blockchain technology that helps make the system a peer-to-peer system with no third-party intervention.
- The use of Smart Contracts reduces the financial costs involved in a transaction as they remove the need for third parties to ensure a secure transaction. Smart Contracts also increase the speed of transactions.