What is a Smart Contract?
Updated: Sep 15, 2021
A smart contract is a self-executing agreement/contract in which the terms between buyer and seller are written into lines of code.
The code and the terms written in the contract are distributed across the decentralized blockchain network.
The code manages the execution, and all the transactions are traceable and irreversible.
Smart contracts ensure trusted transactions and pacts among unknown parties without any involvement of a central bank, authority, legal system, or outside enforcement mechanism.
Let’s discuss how smart contracts and other necessary info about them.
How smart contracts work
Smart contracts follow a basic principle “if/when…then…” Such terms are written into the form of codes on a blockchain.
A network of systems performs these actions only when programmed conditions are checked, verified, and met.
These actions contain various terms, including releasing the date of the funds to the appropriate companies, registering a vehicle, distribution notifications, or delivering a ticket.
The blockchain network is only updated when these terms or transactions are successfully completed.
This also means that no one can change these transactions, and only relevant parties or members who have permission can view the results.
Within a smart contract, you can add as many stipulations as required to assure the participants that the agreement or contract will be carried out satisfactorily.
To set these terms, participants need to define how transactions and their data will be shown on a blockchain network; they must agree on the “if/when...then…” terms that will regulate and execute the transactions and describe a framework to resolve disputes.
Then a coder or developer will program the smart contract.
However, businesses and companies that are using blockchain for their businesses can access and use various templates, web interfaces, and other similar tools and software to simplify the structuring of their smart contracts.
Benefits of smart contracts
Speed, and efficiency, and accuracy
Once a set perm is met, the contract executes instantly.
Furthermore, all smart contracts are digitally programmed; hence there is no complicated paperwork required to process the transactions and no time spent on reconciling the documents as you will have to in manual work.
Trust and transparency
There is no third party in smart contracts, and only encrypted records are shared between the participants.
In this way, no one can question the information’s accuracy, and no participant can alter it for personal benefit.
Blockchain transactions and records are fully encrypted, so they are almost impossible to hack.
Moreover, the blockchain records are connected to the previous and following blocks records on a ledger, so hackers would have to breach the entire chain of blocks to modify or access a single record.
Smart contracts don't need third parties and intermediaries to manage transactions, resulting in reduced costs and quick processing times.
Smart contract applications and blockchain
Blockchain is perfect for keeping smart contracts because of its advanced security and immutability.
As mentioned above, smart contract data is fully encrypted on a ledger that makes it virtually impossible to lose the data that these block contains.
Flexibility is another significant benefit of blockchain technology, and it is integrated into smart contracts.
Developers can stock almost any type of data in the blocks, and they have multiple transaction options to use.
Overall, Blockchain-based smart contracts are innovative solutions that make transactions and other commercial processes more protected, quick, efficient, and cost-effective.
Does Utopia Digital Asset Management's DeFi Infrastructure Fund invest in Smart Contracts?
Smart contracts by their very nature are not an investable asset. However, we invest in numerous Layer 1 protocols on which smart contracts run, which means our fund does hold exposure to smart contracts.
As they become more widely used over the coming years, we expect to see an appreciation in the value of cryptocurrencies associated with smart contracts.
You can invest in our fund via ICONOMI platform from as little as €10.