Smart contracts are a type of digital contract that is stored on a blockchain or distributed ledger system. Smart contracts are automatically activated when the conditions programmed into them are met. Once activated, a smart contract cannot be canceled, but the transactions associated with it can be tracked.
With the advent of Bitcoin, blockchain technology has gained immense popularity and continues to develop rapidly. Blockchain is a distributed ledger technology that was originally used to support decentralized cryptocurrency exchanges, but soon became the basis for new technologies that found application in various industries. The most popular blockchain-based solution today is smart contracts, which are playing an increasingly important role in the banking and financial sectors. They are sometimes referred to as decentralized applications, but this is incorrect, and we will explain why shortly.
The concept of smart contracts was formulated in 1994 by Nick Szabo, a renowned American scientist in the field of information technology—the same man who, in 1998, ten years before the advent of Bitcoin, proposed the idea of the virtual currency Bit Gold and is often referred to as the inventor of Bitcoin, known under the pseudonym Satoshi Nakamoto. According to his concept, smart contracts are securely protected computer protocols that automatically execute the terms of a contract, reducing the cost of transactions.
How do smart contracts work?
Smart contracts are based on a simple computer algorithm that uses the conditional operator if, which is familiar to virtually all developers and programmers. Essentially, the blockchain implements if…then logic, meaning that the computer network performs an action or transaction (e.g., a money transfer) when certain predefined conditions are met (e.g., both traders have fulfilled their part of the deal). Information about the completed transaction is recorded in a new block, and the corresponding blockchain is updated. Since the security of the blockchain is ensured by cryptography, it is impossible to change a completed transaction, and information about it is only available to those who have special permission. Of course, a smart contract can contain as many if…then operators as necessary to ensure the security of a particular transaction. At the same time, for the successful implementation of smart contracts and networks, it is important to create a team of professional developers and specialists in blockchain system management.
Examples and areas of application of smart contracts
It is not difficult to imagine how widely smart contracts are used. They have been used to create many innovative solutions that are used in various industries.
- Construction companies and franchises use smart contracts to increase the transparency of transactions in the supply chain (due to the open nature of the technology) and to resolve disputes with suppliers in real time.
- International financial centers and organizations use large blockchain networks and smart contracts to increase the security and efficiency of transactions involving money and other financial assets and to reduce associated costs.
- Healthcare institutions in countries with developed private and partially subsidized medicine are proposing the use of smart contracts to increase the speed and security of patient medical data exchange between hospitals and insurers.
What are decentralized applications?
Decentralized applications (dApps) are distributed computer programs (often open source) that run on blockchain or peer-to-peer (P2P) networks. Control functions for such applications are distributed among multiple network participants. Decentralized applications provide an additional level of security and transparency for transactions and are gaining popularity in various industries, such as gaming, banking, and finance. Smart contracts are used to implement the functionality of decentralized applications.
How do decentralized applications work?
To enforce predefined rules through code in decentralized applications, smart contracts are used, which eliminates the need for a central server and databases and, consequently, the risk of a single point of failure attack. In decentralized applications, as in conventional ones, commands are transmitted to the server via the user interface, but in decentralized applications, the server part is implemented via a blockchain or peer-to-peer network based on smart contracts, which ensure the functioning of the application. In short, smart contracts allow commands to be sent to the server part of a decentralized application, created on the basis of blockchain, through the user interface.
Types of decentralized applications
There are different types of decentralized applications that allow the management of certain operations to be distributed, eliminating the need for intermediaries. Some of them can, albeit infrequently, be integrated into web browsers as plugins for displaying advertisements, tracking user actions, or collecting donations in cryptocurrency.
Here are some examples of the most popular use cases and potential applications of decentralized applications.
- Financial sector. Decentralized applications simplify financial transactions, such as currency and other asset exchanges.
- Real estate. Decentralized technologies reduce the cost of real estate transactions. In addition, they provide access to data on property rights and title documents.
- Supply chains. Decentralized applications increase the transparency of international supply chains and simplify inventory management by automating tracking.
- Education. One possible use case for decentralized applications in education is the creation of decentralized educational platforms that allow students to interact directly with teachers.
- Cybersecurity and user verification. In the field of information security, decentralized applications can be used for secure storage of identification data and user verification. In fact, at the dawn of blockchain, many believed that distributed ledger technologies would find wide application in cybersecurity, but due to their high resource intensity, other solutions had to be sought.
- Healthcare. As we have already noted, decentralized applications based on smart contracts are ideal for storing and tracking medical data, especially at the international level.
- Non-fungible tokens (NFTs). Some decentralized applications are used as platforms for trading NFTs. Many prefer decentralized applications because blockchain technology ensures transparency and security of token transactions.
