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What is a Smart Contract & How does it work?

What are Smart Contracts

What is a Smart Contract

A smart contract is a set of cryptographic codes that consists of pre-determined rules and the execution of a task. In layman’s terms, the criteria are embedded in the code and once those criteria are met, the corresponding task or event is executed.

For example, you can write a smart contract about paying $450 for rent every 30th of the month, transferring the assets once the predetermined payment is received, vote on the day of elections with the records being untampered, etc. One of the most important qualities of smart contracts is that since the contracts are stored in a blockchain, they cannot be changed once written.

This quality has its own pros and cons. On one hand, it provides transparency and automation, on the other hand, the contract has to be written again if there is any flaw in the code, which sometimes makes the applications pricey. Smart Contracts provide the advantage of automation to its very fundamental nature. Due to the qualities mentioned above, Smart Contracts are autonomous, trustworthy, accurate, secure, and economical. They are economical in a way that the contracts will cut down the expenses incurred by middlemen.

Additional Read: What are Ethereum Dapps? 

How does a Smart Contract Work and Why it is Important?

In today’s world where we are transitioning to Web3.0, smart contracts are the handyman for developers. It helps them in building various decentralized applications or Dapps and tokens among other things. Smart contracts are used in everything from new financial tools to logistics game experiences and so much more! The best part is they are stored on a blockchain like any other crypto transaction. Thus, once a smart-contract app has been added to the blockchain, it generally can never be reversed.

The Dapps that are built using smart contracts include DeFi tech that aims to transform the banking industry as we know it. DeFi apps allow crypto traders to engage in complex financial transactions without a third party involvement. Not only that, but they also enable traders to access these transactions from anywhere in the world. Some of the more popular smart-contract powered applications include:


  • Uniswap: A decentralized exchange that allows users, via smart contract, to trade certain kinds of crypto without any central authority setting the exchange rates.
  • Compound: They allow investors to earn interest and borrowers instantly get a loan without the need for a bank in the middle. 
  • USDC: A cryptocurrency that is pegged via a smart contract to the US dollar, making one USDC worth one U.S. dollar. 

In traditional finance, swapping currencies is expensive and time-consuming. The process is not always easy. But smart contracts and their ability to make transactions transparent without leaving room for any altercations make transactions taking place globally secure and easily accessible. 

Additional Read: How DeFi will Reshape the Future of Finance

Advantages of Smart Contracts

  1. As smart contracts are stored in a blockchain, everything is completely distributed, everyone on the network validates the output and no one is in control of the money. It inherits the properties of a Blockchain. 
  2. Since there is no need to rely on a third party, they are autonomous.
  3. They also help you save money as there is no middleman you have to pay.
  4. Trust is another important benefit as all your doc are encrypted on a shared ledger, they record transactions and no one can say they lost a document or sent money when they didn’t or any other sort of human error.
  5. In a smart contract, you don’t have to worry about your information being lost, as, in a blockchain, each and every peer has a duplicate copy of your documents and is backed up, and retrievable. 
  6. In a traditional contract, it takes a lot of time to manually process paperwork and documents. Smart contracts use code to automate tasks and thereby save hours off many business processes. 
  7. Smart contracts are not only cheaper and faster but also avoid the errors that come from manually filling out piles and piles of forms and documents. They are extremely accurate. 
  8. Smart contracts are immutable as they can never be changed once created.

Disadvantages of Smart Contracts

  1. Smart Contracts are far from perfect though. There are many questions that arise when it comes to the remedies available for the execution of smart contracts. 
  2. Many questions such as what if a bug gets in the code, how would the dispute regulation take place, what if the terms and conditions have to be changed once it has been entered into the hash, etc. 
  3. In a traditional contract, parties can go to court for their disputes and have their contracts rescinded but in Smart contracts the situation is different. Once a contract is executed there is no way to revert transactions, however, this does not take away the right to remedy. The contract and dispute resolution for smart contracts is a very real and growing field.

The list of challenges and technicalities goes on. Experts are trying to work on these critical issues but these issues often dissuade potential adapters from signing on. Several platforms already exist which use Smart Contracts among which Ethereum is the one that has pioneered its application. It is specifically designed and created to support Smart Contracts. 

The success of a platform like Ethereum using Smart Contracts shows that when the issues are ironed out, Smart Contracts are a form of technology that will be the future of contracts.


Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. In case you have any queries, write to .
The above information represent the independent views of Primestack Pte. Ltd, Neblio Technologies Pvt. Ltd, and/or their affiliate entities and are for informational & educational purposes only. The content, information or data provided above is not an offer, or solicitation of an offer, to invest in, or to buy or sell any interest or shares, virtual digital assets/ crypto products or securities, or to participate in any investment or trading strategy. Any statement or communication made above shall not be treated as a legal, financial, investment or tax advice by the reader. The calculations, data, risk-return formulations, performance or market capitalization indicators captured above are based on the independent data sourcing including collation of public information and/or analysis performed by analysts, advisors or employees of Primestack Pte. Ltd/ Neblio Technologies Pvt. Ltd and/or their affiliate companies and/or any third party. Past performance is not indicative of any future results. The reader(s) are hereby advised to consult their financial/ legal/ tax advisor(s) before making any investment.


 

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