What is a Smart Contract for Cryptocurrency?

In this blog post, we will discuss what is the smart contract is and how smart contract is used in the world of cryptocurrency.

What is a smart contract for cryptocurrency? Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met, such as the successful completion of an ICO or the transfer of cryptocurrency between two parties.

Smart contracts can automate virtually any kind of exchange, and they’re already starting to be used in everything from paying freelancers to programing self-driving cars.

How Smart Contracts Work?

In computer science, a smart contract is an event-driven program, with a state, that runs on top of a blockchain and directly controls assets.

They are not controlled by any single person or entity, but rather by whoever holds keys to that particular smart contract.

Smart contracts help to eliminate third-party involvement from any transaction: there’s no need for a middleman like PayPal or Stripe when two parties want to transact quickly and securely online.

For example, if someone wants to rent out their car, they can do so through a service like Turo (formerly RelayRides).

As opposed to going through a rental company which involves all kinds of fees owners set their own price for renting out their cars.

The renter pays that amount directly to the owner via Turo (minus Turo’s service fee), who receives it without having to worry about paying commissions to other entities.

Differences Between Regular & Smart Contracts

Regular contracts are written by humans, smart contracts are written by computers.

The main difference between regular and smart contracts is that regular contracts require trust in an intermediary or third party to oversee them and administer resolution.

While smart contracts automatically execute themselves without any need for third parties.

Smart contracts are advantageous because they reduce expenses associated with arbitration and litigation as well as speed up transactions because they’re transparent and automated.

By removing intermediaries from transactions, smart contracts make exchanges quicker, more efficient, and more secure than ever before possible.

Can’t Bitcoin Do Everything Smart Contracts Do?

Bitcoin was created as a way to send digital cash online. It’s since morphed into something much more, but one thing Bitcoin doesn’t do is run code or store data permanently.

A Smart contract lets you use cryptocurrency like Ethereum to build and deploy applications and protocols that are stored on, and run from, blockchains.

You can use a smart contract to represent money, property, shares, or anything of value similar to cryptocurrency.

Like paper contracts, digital smart contracts define obligations and rights between two parties.

The key difference is that smart contracts have predefined execution steps, called if-then clauses.

For example: if someone sends X amount of currency to Y wallet address, then automatically sell X currency for dollars and transfer dollars to Z account. Or: if someone buys enough tokens at a token sale to reach goal X, then send founders all their tokens.

Related Article: What Is Bitcoin? Technology, Use, Price, Demand, Legal

When Should I Use A Smart Contract Instead Of A Standard Contract?

To know whether to use a smart contract instead of a standard form, ask yourself these two questions:

(1) Does my agreement involve digital assets or payments, and

(2) can I clearly define all possible transaction scenarios? If yes to both questions, then a smart contract may be right for you.

There are many compelling use cases for smart contracts; some of them include decentralized exchanges, peer-to-peer lending platforms, and prediction markets.

Just remember that your Ethereum-based smart contract is only as good as its code, bugs in a smart contract may cause significant losses.

That’s why it’s essential to hire competent developers who understand solidity programming language, cryptography, distributed systems architecture, web3 libraries like Truffle/web3js, and other foundational smart contract components.

Once again, DO NOT attempt to write a smart contract on your own unless you’re an expert programmer! A mistake could cost you dearly!

Why are Smart Contracts Important In Cryptocurrency?

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met, smart contracts can automate virtually any kind of exchange.

Ethereum is the most popular smart contract platform, but many other cryptocurrency blockchains EOS, Neo, Tezos, Tron, Polkadot, and more support them.

This makes them immensely valuable because they allow for seamless execution of exchanges without middlemen.

However, as we’ll see shortly there are some limitations to what kinds of smart contracts can be executed on different platforms.

There’s also one more point that needs to be addressed: What exactly does it mean for something to be smart?

What is Smart contract Based cryptocurrencies?

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met, smart contracts can automate virtually any kind of exchange.

Ethereum is the most popular smart contract platform, but many other cryptocurrency blockchains EOS, Neo, Tezos, Tron, Polkadot, etc have similar capabilities.

While smart contracts aren’t new and predate blockchain technology (see Let’s Make a Deal), they were not feasible until recent advances in cryptography and distributed computing made them possible.

While cryptocurrencies are often thought of as payment systems first and foremost, it is easy to forget what made them revolutionary: programmable money.

Related Article: Top 10 cryptocurrencies in 2021

How do Smart Contracts Work?

Smart contracts, first proposed by Nick Szabo, are programs stored on a blockchain that run when predetermined conditions are met.

They can be used to do anything that can be automated, including exchanging money or property.

The most well-known smart contract platform is Ethereum, though there are many others.

Additionally, some blockchains and tokens allow users to create their own smart contracts; examples include EOS (EOS), Neo (NEO), Tezos (XTZ), Tron (TRX), and Polkadot.

However, it’s important to understand that smart contracts can also exist outside of these platforms.

We’ll explore how smart contracts work within cryptocurrencies further later in this guide.

If you want more information about how other kinds of smart contracts work, check out our guides about the Internet of Things smart contracts, machine-to-machine transactions, and cross-chain communication protocols for data transfer between blockchains.

Related Article: Top 10 Applications of Blockchain in Healthcare

Why are Smart Contracts Important?

There are many applications for smart contracts. For example, if you have loaned money to someone and they have agreed to pay it back by an agreed-upon date and they don’t pay, then you can use a smart contract to pay back your friend automatically if they do not.

The same thing goes for real estate where certain properties could be put up as collateral with automatic payback once some condition such as property ownership changes.

Another common application of smart contracts is crowdfunding campaigns. Crowdfunding sites like Kickstarter have used smart contracts to help manage their own systems by allowing backers to set up secure accounts that only get charged once a project has met its goal.

As mentioned above, smart contracts operate on blockchain technology which allows them all kinds of unique benefits including immutability, trustless transactions, and verified code execution so long as the network remains available even if individual nodes go offline.

Common Challenges with Smart Contracts

It’s not easy to program, with high levels of abstraction and non-trivial coding requirements. The difference between smart contracts and dumb ones can be subtle.

If a smart contract has bugs or fails to self-execute, it will almost certainly require human involvement.

The Ethereum Virtual Machine (EVM) handles the execution of smart contracts on top of Ethereum, but it lacks a formal testing framework and effective tooling for debugging.

There have been several instances where users have made mistakes when creating smart contracts, leading to millions of dollars lost due to unintended errors; such issues may seem manageable when building low-value applications like simple bets, but would likely lead to much more severe consequences if a smart contract were implemented as part of an enterprise solution.

Conclusion

Smart contracts are stored on blockchains and are triggered by predetermined conditions.

Though many people use Ethereum to create their smart contracts, there are other smart-contract-based cryptocurrencies, such as EOS, Neo, Tezos, Tron, and Polkadot. Every blockchain has its own programming language, so you’ll need to familiarize yourself with each one before getting started.

You may also need to adjust your approach based on what assets you’re dealing with; since smart contracts exist entirely in cyberspace, you may have different requirements depending on whether your company deals with real estate or digital data.

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