In this tutorial, we’ll learn what smart contracts are and then learn about their advantages and use cases.
2. What Are Smart Contracts?
Smart contracts are small computer programs stored on a blockchain that run when predetermined conditions are met.
3. Properties of Smart Contracts
Since smart contracts are stored on a blockchain, they inherit some of its properties:
- Immutable: once a smart contract is written, it can never be changed again
- Decentralized: there is no single machine controlling the smart contracts. Instead, there are many machines. These machines are also called “nodes”
- Distributed: the nodes on the network store the same smart contracts with the same state
- Secure: blockchain uses cryptography and encryption and is a secure technology
4. Advantages of Smart Contracts
Smart contracts have many advantages over traditional contracts:
- Fully automated and deterministic: smart contracts run automatically when a predetermined condition is met
- Speed: smart contracts are faster than traditional contracts since they run instantly after the initial condition is met
- Composability: we can use smart contracts from other projects as building blocks for our project, saving us time and energy
- Reusability: once a smart contract is written for a specific scenario, it can also be used for other similar scenarios
- Cost efficiency: there are no third-party fees since there are no third-parties
Now let’s see some of their limitations.
5. Limitations of Smart Contracts
Smart contracts have a few disadvantages:
- No access to data outside the blockchain network: the Ethereum blockchain was designed in a way so that smart contracts can’t access information from outside the blockchain. Otherwise, it would break the consensus. Blockchain oracles are third-party services that provide data from outside the blockchain, aka off-chain data, to the blockchain for smart contracts to use
- Software bugs: like every other software, smart contracts are prone to bugs and errors
6. Use Cases of Smart Contracts
Smart contracts have many use cases. Some of them are:
- Decentralized applications (dapps): smart contracts are the building blocks of decentralized applications. For example, Uniswap is a decentralized cryptocurrency exchange (DEX) that uses smart contracts to run trades
- Decentralized finance (DeFi): DeFi includes financial systems that use blockchain technology. For example, MakerDAO is a company that created Dai, a decentralized stablecoin, using a system of smart contracts on the Ethereum blockchain
- Making payments: of course, smart contracts can be used to transfer funds
- Crowdfunding: a smart contract can unlock funds immediately after certain conditions are met and verified by the community
In this article, we learned what smart contracts are and went through their advantages and use cases.