What does smart contract mean? What are the advantages and disadvantages to be aware of?

Smart Contracts are special protocols used to formulate contracts in the blockchain.
This is an automatically executed contract that writes the terms of the agreement between the two parties into the code.

Smart contracts can also put Dapps (decentralized applications) on the blockchain and be responsible for converting the Dapp into a language that the blockchain can understand.

What does smart contract mean?

Smart Contracts were first proposed by Nick Szabo in 1994.
But it was not until the emergence of Ethereum in recent years that the concept of smart contracts became more complete.

In 2015, Vitalik Buterin, the founder of Ethereum, launched smart contracts and ran them on Ethereum.
To date, Ethereum is still the most widely used smart contract blockchain.

The book "A New Account for the Future Society - Blockchain" also points out that smart contracts must contain 3 elements:

Three elements of smart contracts
Autonomy	As soon as the contract is started It will run automatically without any human intervention.
Self-sufficient	Smart contracts can autonomously control the resources involved in their calculations, such as having the authority to coordinate the funds and property of both parties to the contract.
Decentralization	runs automatically through distributed nodes instead of a centralized single server.
Information compilation: Mr. Market

Smart contract is a kind of agreement between the two parties, which is run on the blockchain in code form and stored in a public database and cannot be changed.

Transactions that occur in smart contracts are processed by the blockchain, which means that they can be executed automatically without a third party. The transaction will only occur when the conditions in the agreement are met, which is completely decentralized. Centralized exchange.

In addition, Ethereum calls applications based on smart contracts
decentralized applications (Decentralized Apps, Dapps),
that is to say, smart contracts can be used to connect Dapps (decentralized applications) and blocks in series Chain, as a bridge between them,
Dapp is similar to the application program APP we often use, but APP is centralized and Dapp is a decentralized program.

• APP: front-end interface plus a centralized server.
• Dapp: Front-end interface plus decentralized smart contract, because it is placed on the blockchain, no server is required.

To put it simply, you can think of Ethereum as an operating system, and Dapps are APPs installed on the operating system.
These APPs are decentralized, data cannot be tampered with, and are open and transparent.
Therefore, it is more convenient than using Centralized APP (traditional APP) is more secure.

What is the difference between smart contracts and traditional contracts?

Traditional contract:

After both parties cooperate and sign,
two or more parties agree to do or not do something in exchange for something, and any party in the contract must trust each other and fulfill their obligations.

At the same time, a third-party law enforcement agency must intervene.
If one party violates the terms, this law enforcement agency will be required to make a judgment.

Smart contract:

Both parties cooperate to sign a contract online. The contract is a code running on the blockchain.
It is stored in a public database and cannot be changed.

An agreement between two or more parties to do or not do something in exchange for something, but there is no need to trust each other,
because the contract content will be fully automatically enforced and open and transparent will not be changed.

For example:

If Xiao Ming wants to buy Daming’s house, he signs a smart contract. The contract runs on the Ethereum blockchain.
The content of the contract is: when Xiao Ming pays 300 Ether coins to Daming, Xiao Ming will get the house. of ownership.

Once this smart contract is signed, it cannot be changed,
This means that Xiao Ming can safely pay 300 Ether coins to buy Daming’s house without worrying about Daming going back on his word.

If you use a traditional contract, Xiao Ming may have to pay a lot of fees from third-party companies when buying a house,
such as banks, lawyers and real estate agents, commissions... etc. It also takes a lot of time.

But the use of smart contracts not only completely eliminates the intervention of third-party companies, but also shortens the time of the entire contract.

What are the application examples of smart contracts?

Smart contracts can be used in many fields. Here are some application examples:

1. Government voting system:

Smart contracts provide a secure environment, making the voting system less likely to be manipulated.
Using smart contracts Votes will be protected by ledgers, which are extremely difficult to decode.

2. Healthcare:

Blockchain can store encoded health records of patients with private keys. Due to privacy concerns,
only specific individuals can be allowed to access these records, and certain research can also use them. Smart contracts are conducted confidentially and securely.

All a patient’s hospital receipts can be stored on the blockchain and automatically shared with insurance companies.
Also, the ledger can be used for different activities such as managing supplies, monitoring medicines and complying with regulations.

3. Financial Services and Insurance:

One of the biggest challenges facing insurance companies is the prevalence of fraud,
Smart contracts can actually be a very useful tool for companies to combat these issues.
Through the use of smart contracts, the insurer and the insured can reach an agreement without using a third-party agency.
This agreement will be immutable and transparent. Although this does not prevent all cases of fraud,
but it can help reduce its prevalence and complexity.

The development of smart contracts has made the development of decentralized finance DeFi more active.
If you want to understand more, please read: What is DeFi?

4. Mortgage transactions:

Smart contracts can be applied to mortgages, allowing buyers and sellers to connect and reach agreements in a secure and controlled environment,
that is, the blockchain.
The contract will regulate all terms and conditions of the sale, thereby eliminating the need for any lawyer or real estate agent involvement (involvement of a third party),
Smart contracts for mortgage transactions can also reduce costs and potential errors.

Mr. Market Tip:
From the above applications, you can find that the greatest value of blockchain is that it is very good at solving the "trust" problem, reducing the cost of obtaining trust from the existing situation, and thereby creating value.

This is also the basis on which we can distinguish a project: How much extra cost does this industry need to pay to build trust? How much trust cost can be reduced through blockchain technology?
From this we can understand whether these new applications are really valuable, or whether they are just empty shells using blockchain as a packaging gimmick.

What are the advantages and risks of smart contracts?

Smart contract is a computer code (node) stored in the blockchain.
The biggest advantage is that it does not require the intervention of a third-party organization, ensuring the openness and transparency of the contract.
The record of transactions runs on the blockchain When the specified conditions are met, it will be automatically executed and cannot be changed.
But in addition to the advantages, it may also have some risks that require special attention, which are introduced below.

Benefits of smart contracts

• Smart contracts do not require the intervention of third-party organizations and can ensure openness and transparency. The encrypted records of transactions are shared among participants and the data cannot be changed.
• Smart contracts can save a lot of money because they omit the intervention of third-party organizations, and are high-speed, efficient and accurate.
• In smart contracts, each block is connected to the previous and next records on a specific ledger, making it more difficult for hackers to invade.

Risks of smart contracts

• When the requirement specifications of smart contracts are not rigorous enough, it will cause developers to misunderstand the requirements, resulting in program execution results that are inconsistent with user expectations. Generally, when we sign a traditional contract, we will ask a lawyer to review the contract terms in advance. In the future, we may also need professional smart contract detection tools to review smart contracts and reduce errors.
  The most classic example is The DAO incident that occurred in 2016. The smart contract program controlling The DAO, a virtual company, was flawed, allowing hackers to use normal procedures to transfer large amounts of the company's funds to designated accounts. To avoid such problems, it is recommended to develop security detection tools for smart contracts to ensure their security.
• Smart contracts have many legal issues and challenges to consider. For example, when a hacker discovers a program vulnerability and takes away a large amount of assets, causing losses to others, is there any legal restriction on this? This is also a challenge that smart contracts will face.
• Smart contracts perform programmed asset transfers on the blockchain platform, and these assets are cryptocurrencies (digital assets), and you will have to bear the risks of trading cryptocurrencies.

Quick summary: What does smart contract mean?

• Smart contract is a computer code (node) stored in the blockchain. Its biggest advantage is that it does not require the intervention of a third-party organization, ensuring that the contract is open and transparent, and the transaction records run on the blockchain , it will be automatically executed when the specified conditions are met and cannot be changed.
• Smart contracts can be used to connect Dapps (decentralized applications) and the blockchain. Dapps are similar to APPs, the applications we often use, but APPs are centralized and Dapps are decentralized.
• When the requirement specifications of smart contracts are not rigorous enough, it will cause developers to misunderstand the requirements, causing the program execution results to be inconsistent with user expectations. In addition, there are many legal issues and challenges to consider.
• Smart contracts perform programmed asset transfers on the blockchain platform, and these assets are cryptocurrencies (digital assets), and you will have to bear the risks of trading cryptocurrencies.

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