Nick Szabo first put forward smart contracts, an American computer scientist who invented a virtual currency called Bit Gold in 1998, precisely ten years before Bitcoin.
Szabo had defined smart contracts as computerized transaction protocols that fulfilled the terms of the contract and wanted to digitally expand electronic transaction methods such as POS (point of sale). With Bitcoin and other cryptocurrencies that came into our lives, smart contracts have begun to be utilized to encourage essential cash exchanges from individual to individual and trades that require a complex flow or based on certain conditions.
The point isn’t only to facilitate, but moreover to program the terms of a real contract and make the contracts come true autonomously without any intercession. These smart contracts utilized nowadays comprise self-executing contracts with the terms of a contract that directly includes lines of code between the buyer and dealer. The code and agreements contained within the contract reside in a dispersed conjointly decentralized blockchain network. Smart contracts permit reliable transactions and agreements, thanks to the truth that they can be realized between different and anonymous parties without the requirement for a central authority, a legal framework, or an outside execution instrument. At the same time, these exchanges are made traceable, transparent, and irreversible. Hence, alongside smart contracts, blockchain technology has gone far past supporting digital monetary forms, mainly considering Bitcoin.
How Smart Contracts Work
In his paper, Szabo proposed the execution of a contract for synthetic assets, such as derivatives and bonds. Szabo wrote:
“These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures.”
Smart contracts have enormous upside potential to be a disruptive industry influencing anybody included in ledger verification, contracts, or sales. A simple case of using a smart contract would be an Airbnb-Esque rental agreement implemented by a digital lock. You send the money to my smart contract, and it sends you the door code. The smart contract holds the money in escrow, discharging it to me on the first day of your stay. If you cancel, the terms of the cancellation would be naturally upheld, and the entryway code would be deleted.
Let’s provide a more complicated example: Think of an online site, you have to pay 1 ETH (Ethereum currency) each time you enter this site. For this, the location makes a smart contract. You compose your mail address to log in to the site. The site gives you a session key and a verification key. You take this key and send this key and 1 ETH to the site login smart contract on Ethereum. Your key is saved within the contract’s database. And the site always checks for the presence of the relevant proof key for the session key. If it finds the key within the database within a certain period, it will let you in.
Smart Contract process
* Contract and terms are determined.
* Contracts are mutually accepted.
* The smart contract is activated.
* The blockchain tracks the contract and waits for the result.
- Obligations and promises of the result are processed by the Blockchain.
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