Smart Contracts for Beginners

Smart Contracts for Beginners

Blockchain technology facilitates a number of innovations, including the ability to create and deploy smart contracts, the building blocks of decentralized applications and organizations.

However, many investors new to the crypto finance ecosystem have difficulty understanding how smart contracts operate, which is why Strategic Coin offers research and educational materials to help investors take advantage of market opportunities within the crypto space. Below, this article provides a guide to smart contracts and their potential applications:

Smart Contracts

Simply put, a smart contract is a self-executing piece of code stored in the blockchain network. Like a conventional contract, it stipulates the terms of the agreement between the parties and defines what actions will be executed if certain conditions are met. However, smart contracts earn their name due to their efficiency and relative cost savings.

Traditional contract enforcement is expensive and time-consuming. Smart contracts operate exactly as they are programmed and the transaction fees required to run the contract in the blockchain are exponentially less than the cost of courtroom litigation. Since blockchain transactions are transparent and unchangeable, contract parties can trust that the contract will be enforced without the need for a middleman or external enforcement mechanism.

To date, smart contracts have been most widely used to deploy initial coin offerings (ICOs). However, developers foresee a myriad of potential use cases, including:

  • Insurance
  • Loans
  • Derivatives
  • Digital Identities
  • Supply Chain Logistics

Smart contracts could potentially be deployed on any public blockchain, but certain platforms–most notably Ethereum–have been developed specifically for this invention.

Dapps

Smart contracts are the building blocks for decentralized applications (Dapps) and decentralized autonomous organizations (DAOs). For users, the dapp experience will be similar to that of a traditional web-based application. However, unlike a conventional web app, dapps do not have a central point of failure since they are secured by the blockchain, not a central server. As a result, user information should theoretically be more secure–provided the code is bug-free–and applications should be less subject to censorship.

DAOs

DAOs, also known as decentralized autonomous companies (DACs) remove the hierarchical governance structure from an organization or company. Using smart contracts, the founders can program the structure and specific rules the organization must follow. Within this structure, shareholders can democratically make decisions that guide the company’s day to day operations, such as hiring or firing employees or paying out dividends.

However, because smart contracts are designed to be unalterable, software bugs can lead to disastrous consequences. The highest-profile one of these organizations–The DAO–had a bug in the code that an attacker exploited to steal more than $50 million. Since the bug was hardcoded into the organization’s structure, there was no technical support team who could correct the issue. Ultimately, the Ethereum community voted to implement a hard fork to recover the stolen funds, but this controversial decision led a disgruntled minority group to split off from Ethereum and form Ethereum Classic.

Strategic Coin is your go-to source for cryptocurrency investment research and education. Whether you need help understanding the basics of blockchain technology or desire to read an in-depth analysis of the latest initial coin offering, Strategic Coin will provide you with the information you need to understand the crypto finance industry.