What is a Smart Contract?

What it is

Smart contracts are everywhere. They assist a wide variety of online transactions in order to protect you from theft and make your life more efficient. 

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So, what exactly is a smart contract?

A smart contract is a program that runs itself. 
They are primarily used to control activity such as trading between cryptocurrency users. Ethereum is currently the most popular cryptocurrency to use smart contracts.

How does a contract run itself?

Traditional contracts are run manually by social institutions like courts, parties, or individuals. These contracts require a lot of human trust, collaboration, and accuracy for maintenance, which can be inefficient and costly.

In 2005, one of the worst typos in human history occurred. 

A company called J-Com listed 610,000 shares of their stock for one yen per share when they were supposed to sell shares for 610,000 yen per share.
This typo ended up costing the business $225,000,000.
The lesson we can all learn from this is that humans are very error prone, especially when it comes to calculating numbers. 

Smart contracts are the modern solution to this problem. They have three main components: 

1. Input
2. Execution
3. Output
   

An ATM is like a smart contract. The first step of using one is to give it your debit card and choose the action of your choice, like withdrawing money. This is the input. You are putting information into the machine.

Next, the ATM uses built-in rules to know what the input is saying. When you select the option to withdraw, the ATM needs a way to know that you aren’t making a deposit. This happens automatically, and is known as execution. You don’t need to call the bank and have them manually perform the withdrawal. This process is completed by different kinds of computer logic.  

Finally, you receive your money. After the rules of the contract are executed, the program gives an output to a user. This output will always be consistent with the execution rules, which makes smart contracts deterministic. 

Deterministic is just Crypto-lingo for consistency and predictability. The deterministic nature of smart contracts saves people in the middle of transactions from making huge mistakes. 

How You Can Benefit

Smart contracts are extremely useful. They are trustless, accurate, and cost-effective. 

Smart contracts don’t require trust between two users. If one person trades cryptocurrency for some good, smart contract technology makes it impossible for one party to scam the other out of the agreement. (Smart contracts allow transactions without trust)

Because they execute automatically, smart contracts do not make mistakes like people do. If you had the choice to withdraw $200 from a random ATM or a random bank teller, you would be smart to withdraw from the ATM every single time. Computers execute financial tasks with far more precision than people do.

Smart contracts are also very financially beneficial. Businesses save a lot of money by automating transactions, allowing them to charge lower prices and save you money in the long run. 

Conclusion

By providing an extra layer of security between parties, smart contracts protect them both from fraud and human error. They make transactions easy and safe for everyone, ensuring peace of mind for consumers and producers alike.