Crypto Glossary: What are Smart Contracts?

Smart Contracts are like vending machines.

This is the analogy that lawyer and computer scientist Nick Szabo used to illustrate how smart contracts would work — long before the first crypto Bitcoin was even created. He was also the first to coin the term “Smart Contract” in 1994.

Let’s say you want to buy a snack from a vending machine.

You slot the required amount into the machine, select your desired item, and the vending machine begins to whir — signalling that your snack is on its way to you.

Vending machines work through a very specific set of steps to ensure each successful transaction — such as making sure that the correct amount is paid before dispensing any items, and ensuring that the right snack or beverage reaches the buyer.

Smart contracts are pretty similar - they ensure that transactions happen without needing the help of interference of external parties.

Find out more on what smart contracts are, how they work and their part in the crypto ecosystem:

What are Smart contracts?

Smart contracts are codes or programs that run on the blockchain, carrying out specific instructions when predetermined conditions are met.

They typically self-execute an agreement so that all participants involved can be immediately certain of the outcome, without the need for any intermediary’s involvement. Smart contracts are the building blocks of many decentralized applications (dApps) in the ecosystem today.

Characteristics of a smart contract

What are some defining features of a smart contract?

Yes, as they are also an agreement between two or more parties to exchange promise/services.

The only difference is that smart contracts are immutable, distributed and trustless.

Immutable

Once a smart contract is created, it cannot be changed again or tampered with. It is permanent and any change to the contract is impossible without consensus on the network.

Distributed

Smart contracts are validated by anyone on the network. As such, no single person has the power to modify the contract.

Trustless

There is no need to rely on third-party intermediaries just to execute the contract.
This allows complicated transactions to be completed within seconds or minutes when they would otherwise take much longer.

How do smart contracts work?

All the fancy characteristics sound pretty good, but how do smart contracts actually work?

Let’s revisit the vending machine analogy to understand how smart contracts can be used.

Customer X wants to buy a can of coke from the vending machine.

Bear in mind that this transaction has to be made without the interference of any external parties - so the vending machine will operate based on a specific set of conditions.

For example:

“When Customer X pays one Singapore Dollar and presses button C1, Customer X will receive one can of Coke.”

Smart contracts are written in the form of “if-then” semantics, which is common in computer programming and refers to the conditional format of “If A happens then B occurs.”

Terms of the contract have to be established by agreeing on the “if/when...then…” rules that will govern future transactions

A network of computers executes the actions when conditions have been met and verified accordingly.

The blockchain is updated when the transaction is completed. Once smart contracts are deployed to the network, it will run as programmed and it cannot be deleted.

Disclaimer: All writers’ opinions are their own and do not constitute financial advice. As a company, we do our best to provide information that is accurate and valuable. The contents of this blog post are intended for educational purposes only. Individuals are advised to perform due diligence before purchasing any cryptocurrencies as these assets are subject to high volatility, and understand the risks associated with trading cryptocurrencies.

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