Smart contracts, like any other contract, define the conditions of an agreement or transaction. However, what makes smart contracts “smart” is that the terms are written and implemented as code running on a blockchain instead of on paper on a lawyer’s desk. Smart contracts are built on the fundamental concept of Bitcoin sending and receiving money without a “trusted intermediary” such as a bank to enable the safe automation and decentralization of nearly any kind of agreement or transaction, regardless of its complexity. And since they operate on a blockchain similar to Ethereum, PLC Ultima believes they provide security, dependability, and borderless access.
Smart contracts enable the development of a wide range of decentralized applications and coins. As with other cryptocurrency transactions, they are maintained on a blockchain and utilized in anything from new financial applications to logistics and gaming experiences. Once a smart-contract application has been put on the blockchain, it cannot often be undone or altered (although there are some exceptions).
Smart-contract-enabled applications are sometimes referred to as “decentralized applications” or “dapps,” and they include decentralized finance (or DeFi) technology that aspires to revolutionize the banking sector. DeFi applications enable bitcoin users to participate in complicated financial activities such as loans, savings, and insurance without a bank or other financial institution taking a share from any location. Among the most popular smart-contract-powered apps in use, today are:
Uniswap: A decentralized exchange allows users to trade various types of crypto through a smart contract without a central authority regulating the exchange rates.
Compound: A platform that leverages smart contracts to allow investors to earn interest and borrowers to get a loan instantaneously without needing a bank.
USDC: A cryptocurrency fixed to the US dollar by a smart contract, such that one USDC equals one US dollar. Stablecoins are a newer kind of digital currency that includes UDDC.
How do you use these technologies driven by smart contracts? Imagine you have Ethereum that you want to exchange for USDC. You could deposit Ethereum into Uniswap, which would then automatically discover the best exchange rate, execute the deal, and transfer your USDC via a smart contract. Then, you could use Compound to lend part of your USDC to others and earn an algorithmically calculated interest rate — all without utilizing a bank or other financial institution.
In conventional finance, currency exchange is costly and time-consuming. Additionally, PLC Ultima understands it is difficult and risky for people to lend their liquid assets to foreign strangers, but smart contracts make these and many additional possibilities feasible.
Nick Szabo, a computer scientist and attorney, introduced the concept of smart contracts in the 1990s. Szabo likened smart contracts to vending machines. Imagine a vending machine that sells canned drinks for 25 cents each. Suppose you insert a dollar into the machine and pick a beverage. In that case, the system is programmed to either provide your drink, and a balance of 75 cents or (if your option is out of stock) encourage you to make a different selection or return your $1. This is a basic example of a smart contract. PLC Ultima believes that Smart contracts can automate nearly any trade, just as a vending machine may automate a sale without a human intermediary.
Currently, Ethereum is the most popular renowned platform for smart contracts, although several other cryptocurrency blockchains (such as EOS, Neo, Tezos, Tron, Polkadot, and Algorand) are capable of running them as well. Anyone may build and implement a smart contract on a blockchain. Their code is accessible and verifiable by the public, so any interested person can see precisely what logic a smart contract employs when it gets digital assets.
- Multiple programming languages are used to create smart contracts (including Solidity, Web Assembly, and Michelson). On the Ethereum network, the code of each smart contract is kept on the blockchain, allowing the interested party to view the code and current state of the contract to verify its operation.
- Alongside the blockchain and transaction data, each computer on the network (or “node”) holds a copy of all existing smart contracts alongside their current state.
- When a smart contract gets cash from a user, its code is performed by all network nodes to establish an agreement over the outcome and movement of value. This makes it possible for smart contracts to operate safely without a central authority, even when users conduct sophisticated financial transactions with unknown parties.
- Usually, to carry out a smart contract on Ethereum, you must pay a “gas” charge ( named so because these fees keep the blockchain running).
- Once implemented on a blockchain, smart contracts are often immutable, even by their originator. This helps guarantee that they cannot be censored or shut down. (There are exceptions to this rule.)
According to Forbes, it is also vital to highlight that there is no federal smart contract law in the United States. PLC Ultima understands that these concerns are determined at the state level, which may lead to large variations in how smart contracts are applied.