Smart contracts are best described as self-executing programs that facilitate a transaction between two parties. Notably, smart contracts are automated, and once the contract or agreement is executed, the transaction is irreversible and trackable. The most important components of smart contracts are that they provide security for agreements and transactions between anonymous parties and don’t require a legal system or central authority. Below we will go into further detail about the history of smart contracts and their various uses.

History of Smart Contracts

The first introduction of smart contracts was recorded in 1994 by Nick Szabo, an American computer scientist. Szabo described smart contracts as a computerized protocol that could execute a contract and complete a transaction. In 1998, Szebo invented “Bit Gold” — one of the first virtual currencies ever created — doing so a decade before the introduction of Bitcoin. Many people suspect that Nick Szabo is the actual inventor of Bitcoin, who is unknown but goes by the pseudonym Satoshi Nakamoto. Szabo has denied these theories to this day.

When Szabo invented smart contracts, he predicted they could play an essential role in the execution of synthetic assets such as bonds and derivatives. Nowadays, smart contracts are used across many different sectors, including supply chain management, real estate, healthcare, and — of course — finance, where it plays a fundamental role in facilitating crypto trading, fueling the rise of cryptocurrency worldwide.

Smart Contract Uses

Due to the design of smart contracts, they have a vast number of different uses. A smart contract’s primary and most straightforward use is to ensure that a transaction occurs between the parties involved. A great example of this is the buying and selling of goods between two parties. Depending on the terms of the contract, the supplier can send the shipment of goods, and upon arrival, the contract will automatically be executed, and the buyer will send payment.

There are a number of applications that smart contracts that can be used. In the health industry, smart contracts safeguard the efficacy of a number of different medications as they allow the temperature of shipments containing lifesaving medication to be monitored. The data can be shared across a number of parties accurately and reliably. Smart contracts also improve the efficiency of international trade by facilitating a standardized trading system which reduces risk and friction. 

Smart Contract Pros and Cons

Advantages

The primary advantage of smart contracts is that they remove the requirement for a third party to facilitate a transaction. This has several benefits for the transaction process. First, it increases the efficiency of transactions as the contracts are executed automatically and therefore do not require someone to actively confirm the completion of the contract. This drastically speeds up the process and optimizes agreements, allowing the parties involved to progress with growing their business much faster.

Smart contracts also increase the accuracy of transactions as they remove the need for a human to execute the agreement. This eliminates any chance of human error resulting in mistakes and wasting time and money. Additionally, smart contracts cannot be altered, making them extremely secure and reliable for making trades. This is incredibly important in reducing the amount of fraudulent activity between trades and saves a lot of money from being lost to potential cyber-attacks.

Disadvantages

There are, however, some disadvantages of smart contracts that are worth mentioning. First of all, because smart contracts are immutable, the programming of the contract cannot be changed. This means that if there are mistakes when the contract is made, you can’t go back and alter it to correct it. This can lead to delays in completing transactions and parties not receiving the correct payment.

Although smart contracts take away the need for a human to execute the contract, it still takes a human to make the code for the agreement. This opens up the possibility for errors while the programmer creates the smart contract. Some loopholes can exist in the coding of contracts, leading to inappropriate execution of contracts and problems.

What Blockchain has Smart Contracts?

The best example of a cryptocurrency that uses smart contracts on its blockchain is Ethereum. It is one of the main reasons why Ethereum grew so significantly and was what set it apart from the most popular cryptocurrency in the world, Bitcoin. However, Bitcoin can now also use smart contracts due to its Taproot upgrade.

Conclusion

Smart contracts have changed how people make transactions online forever. It has optimized the speed and security of contracts and agreements and significantly reduced the chance of mistakes. Smart contracts will probably be used across more industries in the future as we continue to develop new technologies.