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Smart contracts are an incredibly powerful tool that some blockchain technologies have deployed, and they have been developed to offer a decentralized alternative to an existing real-world mechanism. The overarching purpose of smart contracts is to facilitate complex agreements between parties for goods and services. So, instead of using a municipality, such as a bank or lawyer, parties can form complex agreements reliably and securely by themselves.
To understand how this is achieved, we need to first consider the construction of traditional contracts. Essentially contracts are an agreement between parties that binds them to doing something in the future. An example of this would be someone paying a mechanic to repair their car. In that example, the customer gives their car to the mechanic, returns once it is repaired to pay for the service, and receives their repaired car back. While this is a very simple transaction, there is a lot of trust involved along the way between both parties to make good on their promises. The customer must trust that the mechanic will properly fix their car, the mechanic must trust that the customer will provide payment, and the customer must trust that the mechanic will give them back their car.
Smart contracts allow such agreements to be made through a computer code that will only execute the contract when both parties have made good on their promises. This means that the person getting their car repaired pays their service fee to a bond, which is coded to transfer the funds to the mechanic on completion of the repairs or return them to the person if the job is not complete. In other words, both parties agree to the contract and cannot receive what they are owed without fulfilling their end of the deal. Think of it as a more sophisticated version of a vending machine. When you buy a soda from a vending machine, you are executing your part of the agreement by providing payment and the machine is executing its part of the agreement by releasing a can of soda. All of this is made possible via computer code.
The benefit of this system in comparison with traditional contracts is that the entire process is trustless as a smart contract will execute its terms exactly as they are outlined in the computer code. This removes the need to rely on another party making good on their end of the deal and in turn reliance on the legal system to resolve any disputes. It also provides greater transparency than regular contracts through timestamping and unalterable content stored on the blockchain.
At first, it seems difficult to believe that smart contracts could have sophisticated enough coding to execute the complex agreements we make in our daily lives. However, they can be implemented in any situation where the terms of an agreement are objective, providing a wide scope for their application. For instance, a smart contract could be used to purchase a house, which involves a sum of funds being paid by one party and the title for the house being provided by the other. In this scenario, a smart contract could be coded to keep all the house’s doors locked until the buyer pays the required fee. When it comes to smart contracts, if the terms can be made objective, just about anything is possible.
What Else Can Smart Contracts Be Used For?
As well as unlocking new possibilities for decentralized transactions, smart contracts can also be leveraged to build decentralized Applications DApps on the blockchain. Some capabilities of DApps already include facilitating currency loans, trading assets, buying insurance, and converting physical assets into digital tokens. With smart contracts, DApps have the potential to do just about anything.
Algorand’s Smart Contracts
Like most blockchains, Algorand developed its own version of smart contract technology called ASC1 (Algorand Smart Contracts 1) . When creating ASC1, the company prioritized ease of use for DApp developers to ensure they became the go-to place for digital application innovation, which was primarily achieved by offering developers low baseline costs, speed, and system simplicity. The result is that many of the world’s leading DApps are being built on the Algorand blockchain, with many more exciting projects due to be launched soon. There is an endless variety of important digital functions that have been made simple with the DApps that have been built on Algorand smart contracts.
Smart Contract Takeaways
Smart contract technology is a rapidly growing and exciting innovation that is at the heart of wider blockchain development. It is through smart contracts that blockchains will be able to integrate into the mainstream economy, bridging the gap between traditional finance systems and DeFi. Read more about the latest projects being built on Algorand smart contracts here.
