Do you wish it was impossible for you to buy a defective product? That the seller would be unable to sell you a broken piece? Well, smart contracts make this dream a reality. Scams are still widespread in this space – rug pulls seem non-stop. But, smart contracts, in their code, have pre-set conditions if not met, they wouldn’t go forth with the action. So, what is a smart contract? Just a contract with a really high IQ? Well, it’s a bit more complicated than that.
What Is A Smart Contract?
A smart contract is a self-executing programmed mechanism used to conduct sale agreements between two parties. Basically, it’s software entirely written using programming language – mainly Solidity. And, it’s used to automate transactions between two parties.
The twist is that a smart contract is deployed without any external factor, hence “self-executing”. Basically, the contract is built on the “if X is true then Y is done”. The deployer sets the conditions according to which the contract works.
If these conditions are met, the contract automatically performs the action. If not, it doesn’t do anything.
Using a very dumbed-down example, it goes something like this:
- If sent Hi > send Hi back
- You send Hi > you get Hi
- You send Bye > you get nothing
How Does It Work?
Nick Szabo, the inventor of smart contracts, famously compared it to a vending machine.
Imagine a vending machine that sells a bar of chocolate for 1$. You program the machine in a way that:
- If you put in 1$, it gives you the chocolate.
- If the chocolate is sold out, it prompts you to pick something else or returns your money.
- If the chocolate is defective, it doesn’t sell it to you.
That’s its basic concept. Here’s how the process unfolds:
- Interested parties agree on the terms and conditions.
- A contract deployer codes the contract based on agreed-upon terms and conditions.
- The deployer then deploys the smart contract on the blockchain. Each node stores a copy of all existing contracts and their current state alongside the blockchain and transaction data.
- Once the predefined conditions are met, the smart contract automatically executes the function.
- The blockchain network validates the contract’s execution to ensure all conditions are met.
- Once the contract is executed, the network gets updated accordingly.
What Are Its Characteristics?
What makes a smart contract stand out? First, you can program it the way you want. You can choose the conditions that suit your needs and write the code accordingly.
And, the smart contract automatically runs when the pre-set conditions are met. So, no human intervention is required, or is even possible, post-deployment. The smart contract is immutable so no one can alter it once it’s established on the blockchain.
Plus, it’s transparent so anyone can access and view its content.
How Can You Use It?
Considering how efficient it is, you can use a smart contract for multiple purposes. Users primarily adopt it to automate transactions. For example, a food company can use it to make deals with interested personnel across the world.
The most known use of smart contracts are NFTs or non-fungible tokens. We mint these NFTs through smart contracts. “Mint” is just the fancy word for the process of acquiring an NFT straight from the creator.
What Are NFT Smart Contracts?
NFT smart contracts are like the usual ones but you specifically use them to buy, sell, and trade NFTs. The creator writes the code containing everything related to the tokens he or she desires to sell.
- Wallet address of the contract creator
- NFT properties (total supply, token attributes, mint price, how the NFT should function, etc.)
- Conditions under which you can buy, sell, or trade the token
- Percentage of the sale price that goes to the original token creator
So, it contains literally everything you need to know about the NFT. The best thing is everyone can access the contract. And, again, no one can modify it post-deployment.
How Can You Check An NFT’s Smart Contract?
- Open the NFT project’s OpenSea profile.
- Click on Etherscan.
- Open the Etherscan page. You can see the collection’s contract address and a section called “contract”.
- Click on “contract” and voila.
Smart contracts are fast and efficient as they require no human intervention past the deployment phase. However, since they’re immutable, it leaves big room for error. Let’s say you put the contract into use and then discovered you wrote something wrong in the code. You just have to live with it because you can’t change it anymore.
There are a lot of cases where people found loopholes in contracts and ended up executing them in bad faith. Yes, scam attacks can happen here too. Check the Hedera smart contract exploit.