Smart Contract is a digital contract that runs on a blockchain such as Ethereum. As long as the conditions are met, the pre-established contract is automatically executed between the contracting parties without the need for an intermediary. Is it a little difficult to say? Please learn more about smart contracts through this article.
What is a smart contract?
A smart contract is computer code that runs on a blockchain. It leverages the security and transparency of blockchain to make code work according to pre-established methods in an open and secure manner.
For example, let’s say someone buys a piece of digital art via blockchain. At this time, buyers and sellers can transact safely through smart contracts. First, deploy the smart contract required for the transaction to Ethereum. Once the buyer delivers the payment to the seller, ownership of the digital artwork is automatically transferred from the seller to the buyer.
Traditionally, these transactions required an art gallery or intermediary, but smart contracts allow contracts to be carried out through computer code.
To summarize, a smart contract can be said to be “code that is executed when conditions are met.” Because smart contracts are based on blockchain, they are decentralized and cannot be changed or manipulated after deployment.
Where are smart contracts used?
Smart contracts can be used not only for buying and selling something as in the previous example, but also for financial transactions, DApp applications, insurance, supply chain, intellectual property management, voting systems, etc.
The most widely used and popular example is DApp, of which DeFi, decentralized finance, is well known. This refers to a decentralized financial economy where buyers and sellers buy and sell digital assets through smart contracts.
As another example, smart contracts can also be used in voting systems. For example, all voting is conducted on the blockchain and the results are made public for anyone to see. The results cannot be manipulated, thus creating a transparent voting system.
How do smart contracts work?
Smart contracts are code written on the blockchain and are created, distributed, and executed in a decentralized manner.
The most representative smart contract platform is Ethereum, but Solana, Cardano, Klay, etc. can also be used.
After deploying code containing specific contracts and conditions to the platform, you can run the code to call specific functions within the contract.
When a smart contract is invoked, it is validated by the network and the code is then executed following a consensus mechanism.
The results of code that have been executed are recorded on the blockchain, and in most cases, they are recorded in a public manner for everyone to see.
Additionally, the results of the completed contract are final, and the finality of the transaction is guaranteed. Even if one party to the contract wants to reverse it, it is impossible to manipulate and change it alone.
Are there any downsides to smart contracts?
A smart contract may literally look like a ‘smart contract’. However, smart contracts also have some drawbacks.
First, smart contracts have the disadvantage of being overly dependent on external data. If external data sources, called oracles, are tampered with, problems can occur with smart contracts.
Additionally, due to the nature of the code, which is almost impossible to modify or manipulate once distributed, significant damage may occur if vulnerabilities are discovered after distribution.
Lastly, because smart contracts are executed through blockchain, even simple transactions may require more fees than expected, and processing speed may significantly slow down if there is a large number of requests.
Final thoughts
A smart contract can be considered a digital contract on the blockchain that automatically executes the terms of the contract without the need for an intermediary. The characteristic of smart contracts is that they are transparent and secure because they are on the blockchain.
Although smart contracts have some drawbacks, they continue to evolve through continuous testing, security updates, and ongoing development.
