What is a Smart Contract ?

Overview

The concept of smart contract (Smart Contract) was described in the 1990s by Nick Szabo, an American computer scientist. He defined smart contracts as computerized transaction protocols to enforce the terms of the contract.

At that point, the overall goal of smart contract design is to satisfy common contract conditions (such as payment terms, contract terms, security, and even enforcement), and minimize the need for trusted intermediaries.

In general, he outlined the main operating principles, but at that time there was not enough technology and the right environment to realize it.

In 2009, the first application of blockchain technology was introduced by Bitcoin. Bitcoin has laid the basic foundations for the establishment of smart contracts on the Blockchain or “Smart Contract Blockchain” for short. However, it is not yet able to satisfy all smart contract requirements. It was only when Ethereum and Ethereum Smart Contracts were introduced by Vitalik Buterin that the smart contract idea was popularized to all users, providing us with a new way to establish contracts.

What is a Smart Contract ?

In the world of cryptocurrencies, we can define a smart contract as a contract in which the parties themselves perform the terms of the agreement directly through lines of code that are automatically verified and executed through a computer network.

These agreements are operated and executed on a decentralized blockchain network. The entire operation of Smart Contract is performed automatically and without outside intervention, or through an intermediary third party such as a central authority, the legal system.

Transactions made using smart contracts are transparent, easily traceable, and cannot be tampered with or reversed.

Each blockchain has a different smart contract implementation method, for example on Cosmos has WASM, Polkadot has ink!,… The most prominent of which is still Smart Contract running on Ethereum’s virtual machine (Ethereum Virtual Machine – EVM).

How does Smart Contract work?

A smart contract is basically a piece of code that runs on a distributed system (Blockchain), it acts like a certain program (cause-effect). Therefore, a smart contract system usually follows “If… then…” statements. It will execute a specific task when and if a certain condition is met.

The terms of the contract will be written in code, then the lines of code will be encrypted and transferred into a block of the Blockchain. After moving into the block, this Smart Contract will be distributed and replicated by the active nodes on that platform.

Advantages and disadvantages of smart contracts

Advantages

Taking advantage of the strengths of blockchain, so it has the following advantages:

Customizability: smart contracts are highly customizable and can be designed in different ways, providing different types of services and solutions

Transparency and clarity: are decentralized and self-executing programs, every transaction will be recorded on the blockchain extremely clearly.

Reduced operating costs: just pay a very small fee to the blockchain network to make a transaction

High confidence: After the contract is completed, no one or a party can interfere in the implementation process as well as the agreement of the contract.

Disadvantages

Legality: You will not be protected when an error occurs because the laws of other countries do not currently have specific policies.

Contract error: smart contracts are made with human-written computer code. This carries a lot of risk as the code can have holes and bugs.

Non-modifiable: Smart Contract runs on a P2P distributed network, instead of a centralized server, so it cannot be modified and interfered with. Once the Smart Contract is written, if you want to change it, the only way is to rewrite a new contract. Immutability is a great advantage, but in some cases can be a disadvantage.

Application of Smart Contract

With the advantages of smart contracts, we can believe that they will be applied close to life in specific fields such as in areas such as healthcare, insurance, election, business management…

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