When discussing the world of cryptocurrencies and NFTs, one term that comes up a lot is “smart contract.” Smart contracts have a big part to play in the DeFi landscape. But just what are they? You may know the term but not the meaning behind it, so here’s everything you need to know:
Defining a Smart Contract
Investopedia defines a smart contract as:
“A self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.” The code and the agreement exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible. “
Smart Contracts in Simple Terms
Defining a smart contract is fine, but it doesn’t help us understand what they are or how they work. So, let’s break it down.
Likewise any other contract, a smart contract lays out the terms of an agreement or deal. The fact that the terms are founded as code running on a blockchain rather than on paper makes them “smart.”
Built smart contracts are on the fundamental premise that led to the creation of Bitcoin, the ability to send and receive money without a third-party intermediary, such as a bank, to automate and decentralize any deal or transaction securely.
A smart contract is a computer code that resides on a blockchain-based platform and automatically executes all or parts of an agreement based on specific parameters being met. Parties can use the code as the sole means of an agreement or in conjunction with a traditional text-based contract to facilitate the execution of specific conditions, such as transferring funds between the parties.
For example, if Party A sells a property to Party B, the computer code may transfer ownership to Party B once Party A has received the requisite funds.
The code is replicated across multiple blockchain nodes, meaning it benefits from the security, permanence, and immutability that the blockchain provides.
Why are Smart Contracts Important?
Smart Contracts allow developers to build various decentralized apps and tokens. They are used in everything from new financial tools to logistics and gaming experiences.
Smart-contract decentralized apps are often called dApps and include decentralized finance (DeFi) tech that aims to transform the banking industry. DeFi apps allow crypto holders to engage in complex financial transactions – savings, loans, insurance – without a bank or financial institution taking a cut from the proceedings.
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