Ethereum is the second-largest cryptocurrency with a huge market cap of over $44 billion. To fully understand Ethereum, one should properly understand what is a smart contract.
Ethereum is not just a currency; it is also a platform that allows other blockchain applications to be built on it. The Ethereum platform uses a currency called Ether, which is used to pay for transactions.
The Ethereum blockchain works like the Bitcoin blockchain; a network of computers (or nodes) run software that confirms transactions on the network.
Because of the growth in popularity that Ethereum has seen (this is obvious from visiting any crypto exchange platform out there), the question ‘what is a smart contract?’ has become one of the most-asked questions in the crypto space.
What is a Smart Contract
A “smart contract” is simply a piece of code that is running on Ethereum. It’s called a “contract” because code that runs on Ethereum can control valuable things like ETH or other digital assets.
Unlike traditional contracts, a smart contract automatically executes those obligations, often through an escrow-like account. Also unlike a traditional contract, once the terms of a smart contract are recorded on the blockchain, they cannot be altered.
So what does this mean? Smart contracts allow parties — who can remain anonymous — to enter into a binding, transparent agreement with each other. Value can be transferred between parties or held in escrow inside the smart contract itself.
How smart contracts mimic business rules
Smart contracts are neither really “smart” nor contracts in the legal sense. They’re no more than business rules translated into software.
A smart contract is only as good as the rules used for automating processes, which means quality programming is crucial. Also crucial? The accuracy of the data fed into a smart contract. Because smart contract rules, once they’re in place, are unalterable. After a contract is written, neither the user nor programmer can change it.
So if the data isn’t true – and being on a blockchain doesn’t necessarily make it so – the smart contract can’t work properly.
Despite some limitations, smart contracts are key to many use cases and provide us with an opportunity to make transactions and processes more streamlined and automated. Smart contracts are here to stay; the steady increase of deployments year over year only emphasizes their significance within the blockchain ecosystem. The open-source community has fully embraced the concept and have developed many high-quality libraries in various smart contract languages.
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