Smart Contract- Definition , How Does it Work ?

Smart Contract- Definition, How Does it Work 

Smart contracts (also called distributed apps) are very popular nowadays. But what are they and what problems do they solve? 

The term “smart contract” was first used

by Nick Szabo in 1997, long before Bitcoin was created. He is a computer scientist, law scholar and cryptographer so I’ll spare you his exact words.

But in simple terms: he wanted to use a distributed ledger to store contracts. Now, smart contracts are just like contracts in the real world. The only difference is that they are completely digital.

 In fact, a smart contract is actually a tiny computer program that is stored inside a blockchain. Let’s take a look at an example to understand how smart contracts work. 

You probably are familiar with Kickstarter, the large fundraising platform. Product teams can go to Kickstarter, create a project, set a funding goal and start collecting money from others who believe in the idea. 

Kickstarter is essentially a third party that sits between product teams and supporters. This means that both of them need to trust Kickstarter to handle their money correctly. 

If the project gets successfully funded, the project team expects Kickstarter to give them the money. On the other hand, supporters want their money to go to the project if it was funded or to get a refund when it hasn’t reached its goals. 

Both the product team and its supports have to trust Kickstarter. But with smart contracts, we can build a similar system that doesn’t require a third-partylike Kickstarter. 

So let’s create a smart contract for this! We can program the smart contract so that it holds all the received funds until a certain goal is reached. 

The supporters of a project can now transfer their money to the smart contract. If the project gets fully funded, the contract automatically passes the money to the creator of the project.

 And if the project fails to meet the goal, the money automatically goes back to the supporters. Pretty awesome right? 

And because smart contracts are stored on a blockchain, everything is completely distributed. With this technique, no one is in control of the money. 

But wait a minute! Why should we trust a smart contract? Well because smart contracts are stored on a blockchain, they inherit some interesting properties.

 

They are immutable and they are distributed. Being immutable means that once a smart contract is created, it can never be changed again. 

So no one can go behind your back and tamper with the code of your contract. And being distributed means that the output of your contract is validated by everyone on the network. 

So a single person cannot force the contract to release the funds because other people on the network will spot this attempt and mark it as invalid. Tampering with smart contracts becomes almost impossible. 

Smart contracts can be applied to many different things, not just on crowdfunding. Banks could use it to issue loans or to offer automatic payments.

 Insurance companies could use it to process certain claims. Postal companies could use it for payment on delivery, and so on and so on…So, now you might wonder where and how you can use smart contracts. 

Right now there are a handful of blockchains who support smart contracts, but the biggest one is Ethereum. 

It was specifically created and designed to support smart contracts. They can be programmed in a special programming language called Solidity. 

This language was specifically created for Ethereum and uses a syntax that resembles Javascript. It's worth noting that Bitcoin also has support for smart contracts although it’s a lot more limited compared to Ethereum. 

So now you know what smart contracts are and what problem they solve. I hope you enjoyed this video and if you did, hit the like button and get subscribed. And as always: thank you very much for watching! 

Hey everybody, welcome! First of all, please note that this content does neither represent financial, legal, or tax advice, nor is it supposed to be understood or interpreted as a solicitation to buy or sell any securities, coins or tokens.

 we’ll take a closer look at the blockchain technology called Ethereum.In a nutshell: It is a decentralized platform that runs smart contracts and developers can program their custom apps on this blockchain. Over the course of this video, 

we will take a closer look at the main features and we will talk about the numerous use cases of the technology. We will also clarify what the typical terminology like “Decentralized Apps” or “Gas” really means.

Before we dive into the details of the technology let’s take a look at the basic concept of Ethereum. Similar to other blockchain solutions, the Ethereum network is decentralized and consists of many individual computers, called nodes, which communicate with each other via the Ethereum protocol.

The interactions on the Ethereum network are cryptographically secure, so private data remains private and transactions or written data are immutable to undesired modifications.

Until now, the Ethereum network is based on proof of work, which means that the authenticity of transactions or data has to be verified by many nodes before it is permanently stored on the blockchain.

This verification process is done by miners, who provide computing power and receive tradable crypto tokens, so-called ethers, in return. In the future, Ethereum wants to change to a proof-of-stake approach which we will discuss later 

.So far, Ethereum sounds like most of the blockchain solutions out there. But what makes Ethereum so special why is it so popular?

One major advantage can be found in the use of smart contracts. The idea of smart contracts is not entirely new and goes back to computer scientist NickSzabo who came up with this concept in 1994.

Almost 10 years later, a Russian-Canadian programmer, Vitalik Buterin, introduced Ethereumand put smart contracts into action. What exactly are they? 

Smart contracts can be programmed with the Ethereum language and can self-execute when specific conditions are met. 

The Ethereum programming language called Solidity includes many commands and allows the implementation of all kinds of business scenarios within smart contracts. 

This function enables numerous possibilities such as the automatic exchange of money, content, property, shares, or anything of value. 

But also complex transactions like an amortizing loan can be settled with only a few lines of code. Once both parties agree on a contract with an electronic signature, the fulfilment is guaranteed and the contract is automatically executed. 

What makes this functionality so powerful?

Imagine that--whether you want to send money, buy a house, or transfer any value--you do not need a third party as an intermediary. 

Smart contracts reduce transaction costs to a minimum and enable transactions, which were previously quite inefficient. 

In the era of IoT (Internet of Things), microtransactions such as the settlement of a short charging process of an electric car, while waiting at the traffic light, can be realized with smart contracts. 

The absence of a middleman increases efficiency and has the potential to disrupt several industries. 

Another interesting feature is decentralized applications or in short DApps.Developers can build DApps on top of the Ethereum blockchain and create their own solutions. 

There are many use cases such as identity management, crowdfunding, marketplaces oreven voting systems. 

The advantage of DApps can be found in the security and the reliability of the system. Since the system is decentralized, it is,

 for example, practically impossible to attack the system with a Denial of Service attack, where the vast amount of computers would send requests to a single server to interrupt the function of the service. 

In a decentralized network, it does not limit the availability of the service if a few nodes stopped working. This helps to reach higher reliability compared to a centralized system. 

Ethereum can also serve as the base protocol for many applications and is therefore classified as a first layer blockchain. What does it mean? 

Well, developers can even issue their own tokens, which are based on the Ethereum network and distribute the tokens in an individual ICO (Initial Coin Offering). 

The newly created solutions are then categorized as second layer blockchains. 

What is the incentive for miners in the network to execute smart contracts or run decentralized apps? As is often the case in life, it is money. 

Depending on the difficulty of an operation, miners are compensated with Ether or more specifically small denominations of Ether, with the name “Gwei”.The difficulty of the operation is measured in units of “gas”.

Depending on the current utilization of the network, the price of gas changes and the product of the current gas price and the required amount of gas defines the total fee for a transaction. 

This fee structure incentivizes developers to program efficient smart contracts and ensures fair compensation of miners. 

As mentioned before, Ethereum is currently backed by a proof-of-work mechanism. This means transactions are based on the consensus of all participants of the network, which requires high computing power. 

The Ethereum team has suggested a change to a proof-of-stake system and tries to convince the network to adopt the change. 

In this system, a validator makes a deposit (the stake) and validates transactions. If they do not obey the rules of the system, validators lose their deposit. As a consequence, less computing power and energy is needed to validate transactions and to secure the network. 

Ok, so what can you take away from this blog? 

Well, first of all, you have learned that Ethereum is much more than just a cryptocurrency. 

Smart contracts can be run on Ethereum which is based on the Solidity language and allows for the secure execution of business transactions without a middleman. 

Developers can also build decentralized applications on top of Ethereum and even distribute their own tokens. 

The fee structure ensures fair compensation for the computing power of the nodes. In addition, the potential change to the proof of stake mechanism would increase the performance and efficiency of the Ethereum network. 

Therefore, it will be very interesting to follow the development of Ethereum in the future. 

Thanks for watching, I hope you liked it and found this overview useful. If you have any suggestions for our future videos and would like us to investigate atopic, please leave the suggestion in the comments below. 

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