What Are Smart Contracts in Cryptocurrency?

Do you own or are you interested in owning cryptocurrency? If so, it’s essential to research how to invest in digital assets safely and securely. Similar to traditional investment contracts, individuals and businesses use digital agreements called smart contracts to ensure all conditions are fulfilled before executing a transaction. This article will take a closer look at smart contracts, how to use them, how to create one, and some examples to illustrate how they are used in the real world. 

What Is a Smart Contract in Cryptocurrency? 

An American computer scientist, Nick Szabo, who created a virtual currency called “Bit Gold in 1998,” defined smart contracts as “computerized transaction protocols that execute terms of a contract.” A smart contract is a program stored on a distributed, decentralized blockchain network like Ethereum or EOS, which contains code that executes when specific conditions and terms are met and confirmed. These digital contracts are far different from traditional agreements that consist of thick stacks of paperwork sitting on a lawyer’s desk for days to weeks. Rather than use a trusted intermediary like a financial institution or legal system, these contracts use self-executing code to ensure secure, trustworthy transactions for buyers and sellers. Indeed, these smart contracts can safely automate and decentralize nearly any type of digital transaction without needing a centralized authority to validate them. 

Blockchain technology offers borderless accessibility, peer-to-peer functionality, reliability, and security. Due to these key features, developers use smart contracts to build various applications that run on the blockchain. Common examples of applications include: 

  • Insurance 
  • Gaming 
  • Loans 
  • Logistics 
  • Warehouse stocktaking 
  • Voting 

How to Interact with a Smart Contract 

Smart contracts are built using code that follows simple “if/when…then” statements on a blockchain network. These statements are the defined conditions that must be met and verified before an exchange is executed. Once the requirements are met, a network of various computers or “nodes” runs these actions. A wide range of actions may be executed, such as issuing a ticket, registering a vehicle, registering to vote, or sending funds to a specified business. Each computer stores a copy of the contract, which includes the current state (data) of the agreement and the blockchain and transaction data.  

When the contract receives the appropriate funds from users, the code is run via all computers in the network. This step is necessary to ensure that everyone involved receives transaction updates and can agree about the results and the current value obtained. Indeed, this is what makes these contracts “smart” – they take out the need for a central authority by leveraging code to dictate the conditions of secure financial transactions with unknown parties. 

After the exchange is finished, the blockchain network will update with the current state of the contract. This means that the transaction is typically irreversible, and only the relevant parties (buyer and seller) with granted permissions can view the transaction results. However, it depends on the specific blockchain network in use. For some users, a network may make smart contracts’ code transparent, thus allowing users to view the logic followed for contracts when it receives crypto. The main reason why most contracts are irreversible (even for the developers that built them) after they are executed is to prevent any person or entity from censoring or shutting down the blockchain network. 

It’s important to note that not all blockchain networks accept smart contracts. Blockchains that currently accept these contracts include Algorand, EOS, Ethereum, Neo, Polkadot, Tezos, and Tron. Users may need to pay a “gas” fee depending on the network used. Like gas required for vehicles to operate, blockchain networks use crypto gas to run smart contracts. 

How to Make a Smart Contract 

When creating a smart contract, the approach may be slightly different based on the blockchain network in use. Anyone can create and run a smart contract, from a business owner to a skilled software developer. The basic requirements include: 

  • learning how to code using a smart contract language like Solidity, Michelson, Vyper, or Web Assembly 
  • having enough crypto to run a contract to a blockchain network 
  • paying a gas fee to run a contract (pricier than fees for running a crypto transaction) 

Simple Steps to Create Your Crypto Smart Account 

1. Create an account on your preferred blockchain network.

2. Create a crypto wallet.

3. Set up your login credentials and download a Keystore file.

4. Upload the Keystore file to the network and enter your password.

5. Once authenticated, choose a template for your contract.

6. Each template will be slightly different and may be written in a different programming language.

In general, there are a few methods that you will likely see in the template: 

  • init ( ) – initializes a stored value of the template, which is called when the contract is initially deployed on the network and establishes the initial state (data). 
  • getSum ( ) – returns a current value of the template, which will be called during the transaction process.
  • add ( ) – adds a supplied integer to the current value, which will also be called through the transaction process.

7. After the conditions are established, it’s time to deploy and test the contract on the network. To do this, click compile and then deploy. The agreement will prompt you to enter an initial value for the template.

8. After that value is entered, select deploy again. The contract is now successfully launched on the blockchain.

9. To verify that the contract has been deployed, select the deployments tab within the text environment. There should be a magnifying glass icon, which is used to view the contract details, such as the following: 

  • Address 
  • Balance 
  • Deployment (date and time) 
  • Properties  
  • Rewards 
  • Shard 
  • Value 

Real-World Examples of Smart Contracts 

Like any new technology, it can be helpful to explore its real-world applications to gain a better understanding of the value it offers modern society. With smart contracts, businesses worldwide are finding ways to make the world a better, safer, and more efficient place. For example, Pharma Portal is a blockchain platform that tracks temperature-controlled pharmaceuticals via the supply chain. This platform can provide more trustworthy, reliable, and accurate data to pharmacies globally. At we.trade, this trade finance network uses standardized rules and trading options to decrease friction and risk. Indeed, blockchain technology is helping to optimize the trading process and make it easier for other organizations to participate in global trade.  

Protect Your Crypto 

Cryptocurrency is like any other form of money – it’s a prime target for hackers. While it’s important to follow security best practices to protect your crypto from hackers, users should also take additional measures to secure their digital investments from these threat actors. One effective solution is tokenization, replacing crypto with randomly generated numbers called tokens. If a breach impacts a blockchain network, the hackers will have no use for the tokenized data. Depending on how many investments you have in cryptocurrency, this can mean the difference between safeguarding thousands to hundreds of thousands of dollars or losing it all instantly. Check out this Wormhole attack, one of the hundreds of cyberattacks to strike blockchain platforms. 

 

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Topic(s): data security