What are Smart Contracts?

What are Smart Contracts?

Ethereum enables the reality of contracts
Although he was a visionary when predicting smart contracts, Szabo never managed to create them because the software technology of the time was not enough to create such elaborate programs. It was only 11 years later, in 2008, that Satoshi Nakamoto developed the first smart contract: Bitcoin.

However, Bitcoin allowed only simple applications, such as sending and receiving values and recording transactions on the blockchain. It was to solve this problem that Vitalik Buterin made smart contracts real through Ethereum.

Ethereum allows the creation of smart contracts, which are applications similar to traditional contracts, but whose “clauses” are automatically executed when certain circumstances are met.

An example of a smart contract: Imagine that you are staying in a hotel. For this you need to speak with an attendant, who will check your identity and check in for you to enter the room. With a smart contract, this procedure can be done without any human intervention. You only need to send the amount of cryptocurrencies equivalent to the value of the accommodation, for example, and the contract automatically releases the room for you. Likewise, it automatically revokes your access when the hosting period ends.

Advantages and disadvantages of smart contracts

There are several reasons for preferring a smart contract over a traditional contract. First, there is efficiency gained when the various results of the contract are calculated and executed instantly, without the need for notaries, lawyers, bank transfers, etc.

Most important, however, is the security gained in ensuring that neither party can fail with its obligations (as defined in the contract code), default on another party or in some way fail to comply with the agreement established.

However, smart contracts are also subject to failure. Because they are designed by human beings, these contracts are still subject to flaws that their creators may overlook during the process. This can cause problems in contracts that may require human intervention, exactly what the smart contract seeks to eliminate. A famous case of this was DAO, in 2016, which we will see later on.