When you are talking about 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 contained therein exist across a distributed, decentralised 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 really help us understand what they are or how they work. So, let’s break it down.
Just like any contract, a smart contract lays out the terms of an agreement or deal. What makes them “smart” is the fact that the terms are established as code running on a blockchain, rather than on paper.
Smart contracts expand on the basic premise that led to the creation of Bitcoin; sending and receiving money without a third-party intermediary like a bank in the middle, to make it possible to securely automate and decentralise any kind of deal or transaction.
So the term “smart contract” is actually used to describe a computer code stored on a blockchain-based platform that automatichally executes all or parts of an agreement based on certain parameters being met. The code can either be the sole result of an agreement between parties, or it can be used in conjunction with a traditional text-based contract to execute certain provisions, such as transferring funds between the parties.
For example, if Party A is selling a property to Party B, the computer code may transfer ownership of the property to Party B once Party A has received the requisite amount of funds.
The code itself is replicated across multiple nodes of a blockchain, meaning it benefits from the security, permanence, and immutability that the blockchain provides.
Why are Smart Contracts Important?
Smart Contracts allow developers to build a wide variety of decentralised apps and tokens. They are used in everything from new financial tools to logistics and gaming experiences.
Smart-contract decentralised apps are often referred to as dApps and include decentralised 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 other financial institution taking a cut from the proceedings.
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