Please click the link below to listen to the 45th episode of my weekly crypto podcast ‘Two Minute Crypto.’ These are intended to be short, single-topic ramblings on some aspect of the cryptosphere. Consider dropping a like and or a review on iTunes or Podbean if you enjoy the podcast. Comments and critiques welcome.
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Two Minute Crypto – Key Concepts 6 – Smart Contracts
Welcome to Two Minute Crypto -today examines another key concept in crypto – Smart Contracts. As usual, an attempt is made to eliminate the use of jargon and to break down concepts into the simplest possible terms. These explanations are intended to form the basis of a sound introduction into the world of blockchain and cryptocurrency. Shades of gray and differences of degree (for example slightly varying implementations of smart contracts across different crypto projects) are put to one side in the interests of clarity.
What is a Smart Contract?
A smart contract is really as it seems – it is a digital version of a binding agreement between two or more parties that carries itself out or executes automatically based on real-world information it receives. It is a contract as code – the parties involved first draw up the terms of their agreement usually for the purpose of doing business and these terms are coded into the contract.
Once written into the agreement the conditions of the contract become automated. The agreement in its digital form does not require the supervision of the parties it covers. In very simple terms the digital agreement works in an A-B manner – If A then action B. It can be as simple as one action performed once such as a payment on delivery of an agreed-upon sum or as complex as many thousands of intertwined actions through time.
Once drafted and agreed upon the digital contract cannot be altered by any outside party. Any attempt to edit the agreement would involve all the parties who originally created the agreement and it could not simply be changed by one side. As the contract is decentralized or distributed it is, therefore, free from centralized control – it cannot be hidden or removed from public view – it is on a blockchain and can be inspected by anyone. The digital agreement will remain in place until the terms that govern it are fulfilled.
To give a practical example -two companies wish to do business. They do not need to trust each other. They simply draft a smart contract, agree the terms and conditions, place the necessary funds in the contract and from that point conduct their transaction.
If the agreement is for the delivery of a product in a certain quantity and quality by a certain date – the funds for that product will not be released until the 3 criteria of the agreement have been met – quantity/quality and delivery. However, if these criteria are met – the producer is guaranteed to be paid. The other party cannot renege on the agreement as the funds are locked up in the contract.
A smart contract requires an interface with the outside world in order to gather the data to allow it to confirm or deny the information it requires in order to execute. The next instalment of the Key Concepts series will focus on these sources of information or Oracles as they are known.
The key benefits of smart contracts are the ability to conduct some form of transaction without the requirement of trust between the people involved and the automation of that process.
Smart contracts just like paper versions need to be carefully checked or audited as bugs or coding errors can result in a loss of access to funds or expose the contract to being hacked.
Thanks for listening.